Corporate Crime and Punishment: The Politics of Negotiated Justice in Global Markets 9780691253527

Citation preview

cor por at e cr i m e a n d pu n ish m e n t

Corporate Crime and Punishment t h e pol i t ic s of n e go t i at e d j ust ice i n gl oba l m a r k ets

cor n e l i a wol l

pr i nce­t on u n i v e r sit y pr e ss pr i nce­t on & ox for d

Copyright © 2023 by Prince­ton University Press Prince­ton University Press is committed to the protection of copyright and the intellectual property our authors entrust to us. Copyright promotes the pro­gress and integrity of knowledge. Thank you for supporting ­free speech and the global exchange of ideas by purchasing an authorized edition of this book. If you wish to reproduce or distribute any part of it in any form, please obtain permission. Requests for permission to reproduce material from this work should be sent to permissions@press​.­princeton​.­edu Published by Prince­ton University Press 41 William Street, Prince­ton, New Jersey 08540 99 Banbury Road, Oxford OX2 6JX press​.­princeton​.­edu All Rights Reserved Library of Congress Cataloging-in-Publication Data Names: Woll, Cornelia, author. Title: Corporate crime and punishment : the politics of negotiated justice in global markets / Cornelia Woll. Description: 1 Edition. | Princeton : Princeton University Press, [2023] | Includes bibliographical references and index. Identifiers: LCCN 2023011749 (print) | LCCN 2023011750 (ebook) | ISBN 9780691250328 (hardback) | ISBN 9780691253527 (ebook) Subjects: LCSH: Corporations—Corrupt practices. | Commercial crimes. | Commercial crimes—Prevention. | Business ethics. | Corporate governance— Law and legislation—Criminal provisions. | BISAC: POLITICAL SCIENCE / International Relations / General | LAW / Corporate Classification: LCC HV6768 .W645 2023 (print) | LCC HV6768 (ebook) | DDC 364.16/8—dc23/eng/20230313 LC record available at https://lccn.loc.gov/2023011749 LC ebook record available at https://lccn.loc.gov/2023011750 British Library Cataloging-­in-­Publication Data is available Editorial: Hannah Paul and Josh Drake Production Editorial: Karen Car­ter Jacket Design: Benjamin Higgins Production: Erin Suydam Publicity: William Pagdatoon This book has been composed in Arno Pro Printed on acid-­free paper. ∞ Printed in the United States of Amer­i­ca 10 ​9 ​8 ​7 ​6 ​5 ​4 ​3 ​2 ​1

To Charlotte and Alice

C on t e n t s

List of Illustrations and ­Tables ix Preface xi Abbreviations xv 1. Sites of Conflict

1

An End to Corporate Impunity or American Imperialism?

3

How Extraterritorial Law Enforcement Leads to the Rise of Negotiated Corporate Justice

6

Market Power and ­Legal Irritants

8

Unfolding the Argument

10

2. The Moral Economy of Corporate Justice

12

­Legal Change across Bound­aries

15

­Legal Traditions and Corporate Criminality

21

Moral Economies

27

Conclusion

33

3. Corporate Prosecutions in the United States

35

The Evolution of Corporate Criminal Enforcement

37

Overview and Trends

42

Global Enforcement—­Home Advantage

51

Pos­si­ble Explanations for Home Bias

54

Conclusion

56

vii

viii  C o n t e n t s

4. Extraterritoriality through Market Power

58

Law and Territory

61

Unilateral Expansion of Jurisdiction

63

The Long Arm of American Law

66

Conclusion

78

5. Economic Lawfare

81

Economic Rivalries in an Interdependent World

84

Economic Lawfare in Support of Geoeconomic Strategies

87

Targeting Companies to Win Geoeconomic Advantage

93

Conclusion

105

6. The Rise of Negotiated Justice

108

Institutional Change through Irritation

111

Negotiated Corporate Justice

113

Comparing Institutional Change

116

Va­ri­e­ties of Negotiated Justice

131

7. Crime and Punishment in the Global Economy

134

Globalization as the Competitive Transformation of Corporate Justice

134

The Challenges of Negotiated Corporate Justice

137

Lessons from Abroad

139

Geopolitics vs. Demo­cratic Legitimacy

140

Appendix  143 Notes  153 Bibliography  191 Index  221

i l lu s t r at ions a n d ­t a bl e s

Illustrations

1.1 Corporate criminal fines by country of origin

5



3.1 Total fines and number of cases per year

43



3.2 The rise of deferred and nonprosecution agreements

44



3.3 Variation in dispositions by com­pany type

45



4.1 Share of total payments of foreign firms by type of crime

77

­Tables

2.1 Perspectives on the circulation of law

17



2.2 Two paradigms of corporate justice

33



3.1 Linear regression on log fines

53



5.1 Defining authority in global markets

92



6.1 Alternatives to criminal trial procedures

115



6.2 Institutional adaptation across cases

132



A.1 Top 20 of total fines

145

A.2 Top 20 of total payments

146

A.3 Penalties by type of crime

147

A.4 Linear regression on log fines vs. total payment

149

A.5 Linear regression on log fine and two-­part model estimating probability and size of fines

ix

150–51

p r e fac e

reflecting on the havoc wrecked by the 2008 financial crisis, investors portrayed in Michael Lewis’s The Big Short wondered ­whether the businessmen responsible for the fragility of the bond markets deserved to be fired or ­whether they should be put in jail. One of them concluded, “­There w ­ ere more morons than crooks, but the crooks ­were higher up.”1 ­After writing a book on the bailouts of financial institutions in six countries, I became interested in the judicial fallout of corporate mismanagement in 2014. Like most observers, I was struck by the absence of ­trials and sentences for ­those at the heart of the financial meltdown. I accumulated data on regulatory and criminal penalties but was unable to make sense of much of the information. The origin of the fines, the l­ egal terms used, the diversity of the regulators charged with enforcement across countries made ­every comparison feel like apples and oranges at best, so I put the proj­ect aside. As time passed, larger and larger fines made the headlines, not just for financial institutions but for a variety of companies and for numerous charges ranging from fraud and corruption to the violation of economic sanctions and environmental degradation. For some companies, individual penalties even passed the one-­billion-­dollar mark. It became clear that companies no longer got away with misconduct, but the punishment they received was largely financial. More strikingly, the ­legal sanctions w ­ ere most often pronounced by American authorities, even for foreign companies and in cases concerning conduct abroad. I returned to my research in 2018, and by then it had become a study of the transformation of corporate criminal law in global markets. I found that evolutions in American corporate criminal law had triggered a worldwide change in how companies w ­ ill be held legally accountable in global markets. Combined with market power, the use of negotiated settlements allowed American authorities to reach far beyond their territorial bound­aries and prosecute corporate crime worldwide. As much as one may salute law enforcement on corporate crime, recent trends have shown impor­tant biases xi

xii p r e fa c e

against foreign firms, which strained intergovernmental relations. In some cases, multinational companies became the site of geopo­liti­cal conflict. B ­ ehind the veil of a ­legal dispute, prosecution became a tool in the defense of American interests abroad. At the same time, US enforcement shed the light on corporate wrongdoing that ­was embarrassing for foreign governments, questioning the efficiency of their own judicial oversight. In an attempt to reaffirm their capacity to go ­after corporate crime and to reestablish judicial sovereignty over their companies, numerous countries have adapted their corporate criminal doctrines to allow for more flexible negotiated settlements. In less than twenty years, the resulting rise of negotiated corporate justice has fundamentally transformed the moral economy of global markets. This is the story I would like to tell. Companies are no longer above the law in global markets, and compliance has turned into a major challenge during the last de­cades. But law is not just a neutral arbiter between right and wrong when domestic law travels across bound­aries. Law enforcement happens in a context where power politics m ­ atter and where companies can become the site of interstate conflict. In addition, the negotiated nature of ­legal settlements creates substantial inequalities: between countries, between companies, between individuals that are well placed and know how to navigate the system and t­ hose that are not. Some of the most likely candidates for severe sanctions ­w ill walk away unscathed, while other receive heavy punishment. Tracing ­these dynamics and understanding their impact is the ambition of this book. The book can be read in several ways. ­Those interested in the evolution of corporate criminal law in the United States in par­tic­u­lar can read chapters 1 and 3. The dynamics that create a contagion from American law enforcement to institutional change abroad are analyzed theoretically in chapter 2 and empirically in chapter 6. International relations scholars concerned about the use of ­legal instruments for geopo­liti­cal ends can focus on chapters 4 and 5. Chapter 7 summarizes the argument and analyzes the implications of the rise of negotiated corporate justice. By weaving together ­these dif­fer­ent strands, my hope is to convince the reader that we are seeing a profound shift in how companies are disciplined in the global economy and how their actions are brought in line with government ambitions. I had the privilege to brainstorm on many of ­these themes as I discovered them with audiences that w ­ ere far more knowledgeable than myself. My gratitude for excellent feedback goes to the organizers and participants of seminars at Sciences Po, the Quality of Government Institute at Gothenburg University,

p r e fa c e   xiii

the Hamburg Institute for Social Research, the Watson Institute at Brown University, the Max Planck Institute for the Study of Socie­ties, the London School of Economics, the Center for Advanced Studies on the Foundations of Law and Finance at Goethe University Frankfurt, the Institute for Law and Economics at the University of Hamburg, the Global Research in International Po­liti­cal Economy Seminar, the Eu­ro­pean Union Program at Prince­ton University, the Social Science Division of New York University Abu Dhabi, the Nuffield Seminar at Oxford University, the University Paris Sciences et Lettres, the École des hautes études en sciences sociales and the Hertie School Berlin. The International Relations Department at the London School of Economics provided me with a wonderful opportunity to discuss my proj­ect with their students during a retreat in Windsor, which profoundly influenced the final shape of the book. The proj­ect was supported in multiple ways by my academic homes. The Max Planck Sciences Po Center on Coping with Instability in Market Socie­ties and the Center for Eu­ro­pean Studies and Comparative Politics at Sciences Po enabled me to write the bulk of the manuscript between 2018 and 2021. An invitation to Frankfurt in early 2020 by the Center for Advanced Studies on the Foundations of Law and Finance, funded by the German Research Foundation (DFG Proj­ect FOR 2774), at Goethe University Frankfurt helped me to start writing and get the proj­ect off the ground. My heartfelt thanks to Tobias Tröger and Rainer Haselmann for hosting me at a critical moment in my research. Sciences Po has been terrifically flexible when it became clear that my sabbatical would be cut short by the lockdowns that marked the year 2020. Fi­nally, the Hertie School in Berlin has allowed me to finish the manuscript in excellent condition. For precious research assistance, I would like to thank Felipe Kup Barbieri de Matos, Shuhao Ren, and Jan Friedrich. Daniel Powers provided outstanding country reports and became a sounding board for the book as it progressed. Yuma Ando’s help with the data analy­sis was superlative: his proactive and attentive probes greatly solidified my grasp of corporate prosecutions. Sarah Lawton-­Görlach provided excellent assistance in the final editing of the manuscript. A preliminary version of chapter 3 has been published as “Corporate Prosecutions: American Law Enforcement in Global Markets,” LawFin Working Paper No. 31, 19 April 2022. I had the good fortune of being surrounded by colleagues who helped me move forward. In Sciences Po, I benefited from the support and critical eye of Olivier Godechot, Allison Rovny, Emiliano Grossman, Matthias Thiemann, Bruno Palier, Cyril Benoît, and Dina Waked. For insightful comments,

xiv p r e fa c e

inspiration, or help on technical issues, I would also like to thank Jens Beckert, Mark Blyth, Benjamin Braun, Pepper Culpepper, Carl Dahlström, Jens Dammann, Matias Dewey, Romain Ferrali, Chase Foster, Jeffrey Frieden, Roy Gava, Matthias Goldmann, Ezequiel Gonzalez Ocantos, Kai Hart-­Hönig, Rainer Haselmann, Jan Pieter Krahnen, Katja Langenbucher, Johannes Lindner, Maxime Marzin, Elsa Massoc, Sophie Meunier, Sascha Münnich, Casimiro Nigro, Vincenzo Pezone, Stephanie Rickard, Wolf-­Georg Ringe, Lucas Ronconi, Peter Rosendorff, Rahul Sagar, Aaron Sahr, Denis Saint-­Martin, Kathleen Thelen, Tobias Tröger, Florian Überbacher, Stefan Voigt, Masako Wakui, Etienne Wasmer, Lucia Wülfing, and Nick Ziegler as well as the ­legal and policy experts who agreed to discuss their work with me anonymously. Régis Bismuth, Gaspard Estrada, Brandon Garrett, Katja Langenbucher, and Abraham Newman generously provided a critical reading of the full draft. At Prince­ton University Press, I am indebted to Hannah Paul for her enthusiasm, careful reading, and guidance, together with Josh Drake. My ­family deserves the greatest thanks. Steadily encouraged by my m ­ other, I completed the manuscript in memory of my ­father, who did not live to see it published. My ­sister Bettina, her husband Cyril, and the Després f­ amily proudly followed each step in this book’s development. My husband Morgan’s love and encouragement kept me sane while writing a book during a pandemic. My two ­daughters, Alice and Charlotte, grew up with this proj­ect and shared the experience. While my seven-­year-­old started lecturing the f­ amily on crime and punishment, my nine-­year-­old started racing me by writing her own stories and comparing the number of pages written each day. This book is dedicated to them.

A bbr e v i at ions



5G

Fifth-­generation technology for broadband cellular networks



CEO

chief executive officer



CIA

Central Intelligence Agency

CFIUS

Committee on Foreign Investment in the United States



EU

Eu­ro­pean Union



FBI

Federal Bureau of Investigation

FCPA

Foreign Corrupt Practices Act



FIFA

Fédération Internationale de Football Association (International Federation of Association Football)



G20

Group of Twenty intergovernmental forum



GDP

gross domestic product

INSTEX

Instrument in Support of Trade Exchanges

IOSCO

International Organ­ization of Securities Commission



IRS

Internal Revenue Ser­vice



JFTC

Japa­nese ­Free Trade Commission

LIBOR

London Interbank Offered Rate

NATO

North Atlantic Treaty Organ­ization



NGO

nongovernmental organ­ization



nsa

National Security Agency

OECD

Organ­ization for Economic Co-­operation and Development



Securities and Exchange Commission

SEC

xv

xvi  A b b r e v i a t i on s

SWIFT

Society for Worldwide Interbank Financial Telecommunication



UN

United Nations



US

United States



WTO

World Trade Organ­ization

cor por at e cr i m e a n d pu n ish m e n t

1 Sites of Conflict

when frédéric Pierucci’s flight touched down at New York’s JFK airport ­after a twenty-­four-­hour trip from Singapore on April 14, 2013, he did not imagine that he was about to spend the next fourteen months of his life in a high-­security prison in Rhode Island. Whisked off the plane in handcuffs, Pierucci was informed by the FBI that his arrest was linked to an investigation against Alstom on corruption charges. The French multinational transport and energy g­ iant was suspected to have engaged in bribery to win a power contract in Indonesia ten years e­ arlier. Since the start of investigations in 2010, the com­ pany had not fully cooperated with US authorities, to the ­great dismay of the Department of Justice and the US Attorney’s Office for the District of Connecticut investigating the case. Assistant District Attorney David Novick was aware that he had not yet caught a central figure and confirmed that the goal was to prosecute Alstom’s top management, most notably Patrick Kron, the com­pany’s CEO. Accusing Pierucci of conspiracy in acts of corruption of an Indonesian official, Novick was investigating a violation of the US Foreign Corrupt Practices Act, punishable with up to ten years in prison and a fine of 500,000 US dollars. What the thirty-­ five-­year-­old assistant district attorney ­really wanted, however, was information to help bring a stronger case against Alstom. “Mr. Pierucci, I strongly advise you not to call your com­pany. We would like you to do t­ hings for us,” Novick stated. Jetlagged, without sleep, and handcuffed, Pierucci had to respond to the offer Novick presented, to become an in­for­mant in his own com­pany. It ran ­counter to the two instructions he had received during an internal training session for ­these kinds of instances: “(1) ­don’t say anything and (2) call Alstom’s l­ egal department, which ­will immediately send a ­lawyer,” similar to the Miranda warning one sees on tele­vi­sion during an arrest.1 “For the time being, you should give up the help of a l­ awyer,” Novick suggested, “but of course, that 1

2  c h a p t e r 1

is your choice.” Without imaging for a second what it would cost him, Pierucci turned down the offer and asked to call his com­pany’s ­legal department and the French Consulate.2 This decision sealed the indictment for corruption and money laundering and started a nightmare that would last five and a half years. Considered a flight risk, he was denied bail and transferred to a high-­security prison, where he would remain for fourteen months. In the hope of more favorable conditions, he pled guilty in July 2013 on the advice of the com­pany’s ­lawyer, a decision he ­later described as a “monumental error,” b­ ecause it closed off any possibility of arguing that he was far down in the chain of command.3 For four months, he shared with fifty-­four inmates a dormitory containing five showers and two toilets without doors. For nine months, he was not allowed to go out into the courtyard. At times, he did not even have a win­dow. Over the course of his stay, three inmates w ­ ere found dead in unexplained circumstances. During the first year, Pierucci, a f­ ather of four, was permitted to see his wife only once for a duration of two hours. He saw his c­ hildren again a­ fter f­ amily and friends succeeded in putting up $1.5 million for bail so that he could be released in 2014. By then, he had been fired from Alstom following his guilty plea. He returned to Connecticut in September 2017 for the trial and was sentenced to thirty months in prison (which ended up including some of the time spent awaiting trial). He was released in September 2018. ­Behind his personal plight lies a much broader story about Alstom’s ­battles with the US ­legal system. Pierucci was one of three Alstom man­ag­ers who ­were charged and ended up pleading guilty to a seven-­year scheme to bribe Indonesian officials to secure a public contract worth $118 million.4 With the pressure put on individual officers, the companies involved in the bribery began to cave in. Marubeni Corporation, Alstom’s Japa­nese consortium partner in the Indonesian scheme, pled guilty on March 19, 2014, and was sentenced to a criminal fine of $88 million.5 On December 22, 2014, Alstom surrendered. It admitted to bribing officials around the world, including in Indonesia, Saudi Arabia, Egypt, the Bahamas, and Taiwan. The com­pany was sentenced to the “largest-­ever criminal foreign bribery fine,” as the Department of Justice proudly announced.6 The cases brought against individual man­ag­ers ­were crucial in achieving the outcome, as Assistant Attorney General Leslie Caldwell stated: “It was only ­after the department publicly charged several Alstom executives—­ three years a­ fter the investigation began—­that the com­pany fi­nally co-­ operated.”7 Saluting the rec­ord sentence, First Assistant US Attorney Michael J. Gustafson of the District of Connecticut declared, “­Today’s historic resolution

S i t e s o f C o n f l i c t  3

is an impor­tant reminder that our moral and ­legal mandate to stamp out corruption does not stop at any border, ­whether city, state or national.”8 Despite the rec­ord fine, Alstom’s case is not isolated. We see more and more corporations on trial, investigations with headquarter raids, some spectacular arrests, and frequent headlines about fines of stunning amounts. In 2008, Alstom’s German competitor Siemens was prosecuted in Germany, the United States, Italy, and Liechtenstein for similar corruption charges worldwide and paid $1.8 billion dollars, including a settlement in the United States for $800 million. A de­cade ­later, foreign corrupt practices enforcement has cost Swedish telecom provider Ericsson over $1 billion in criminal and civil penalties, second only to the Brazilian oil com­pany Petrobras’s $1.78 billion settlement in 2018. Environmental damage and fraud w ­ ere most visibly prosecuted in the car emission scandal known as “Dieselgate,” which started when the US Environmental Protection Agency issued a notice of violation against German car manufacturer Volks­wagen.9 Investigations in at least twenty countries worldwide included a growing number of private lawsuits, with criminal convictions and arrest warrants against se­nior management, such as former CEO Martin Winterkorn. The emissions scandal subsequently engulfed a large portion of the automobile industry, with charges brought against Daimler, BMW, and Fiat Chrysler, among ­others. The impact of this scandal is comparable to the 2010 Deepwater Horizon disaster that involved one of the greatest oil spills off the US coast. In 2015, BP agreed to pay $20.8 billion to the US government and five other Gulf of Mexico states.10 In the financial industry, settlements and fines have accumulated to over $240 billion ten years ­after the crisis, with Bank of Amer­i­ca estimated to lead with cumulative sanction of $76 billion.11 For individual companies and sometimes entire industries, the sanctions imposed are severe, marking a sea change from e­ arlier de­cades. Although corporate crime is nothing new, we seem to be moving away from the time of the robber barons of the nineteenth c­ entury or the intractable global corporate misconduct of the twentieth c­ entury. From even a glimpse of the cases listed above, it seems that ­those who encourage or turn a blind eye to corporate fraud, negligence, or outright criminality in global markets ­will pay a heavy price.

An End to Corporate Impunity or American Imperialism? Many observers have taken note of this sea change, but t­ here is l­ ittle consensus about the motivations and stakes ­behind the efforts to crack down on corporate criminality. What is more, one can, depending on one’s reading of current

4  c h a p t e r 1

events, arrive at widely dif­fer­ent conclusions about the desirability of law enforcement in global markets. One the one hand, critics of corporate impunity ­will salute the rise in law enforcement, which is fi­nally reaching power­ful companies. From this perspective, multinational corporations have evaded l­egal constraints for far too long, systematically engaging in strategies that sought to find the most advantageous setting and maximize profits at the expense of societal and environmental norms. The conviction of man­ag­ers responsible for outright violations is both necessary and a ­matter of socioeconomic equality. Criminals tried and convicted for other crimes find themselves is situations that are not dif­fer­ent, often even much worse, than white-­collar criminals, and the latter have considerably more resources for their ­legal defense. Even a quick glimpse at the most recent corporate criminal prosecutions shows the breadth and depth of detrimental business activities for individual health, safety, and livelihood. From a “global corporate justice” perspective, executives and companies are now fi­nally being held legally accountable despite their high mobility.12 The Alstom case and similar examples simply show that bribery is being prosecuted at home and abroad, which previously would have been improbable for a business of such strategic importance and with such close connections to the French government. On the other hand, geopo­liti­cal observers warn about the American dominance in imposing rules of conduct that draw on what is largely domestic law, pointing to the extraterritorial reach of US enforcement agencies acting as the new “global police.” Since the turn of the ­century, Amer­i­ca has stepped up efforts to enforce its economic sanctions, reduce corruption, and fight money laundering and tax evasion with judicial programs reaching far beyond its borders. In many instances, critics point to the promotion of national economic and security interests driving enforcement rather than loftier ethical standards for international business. This would explain the disproportionate effect on foreign companies observed in recent years. According to one overview, three quarters of the $25 billion of fines collected for money laundering, corruption, and sanctions violations have come from foreign companies, while US companies have been fined less than $5 billion.13 Another dataset listing fines levied in corporate criminal cases shows that foreign companies make up 16 ­percent of federal prosecutions but account for 57 ­percent of the total of fines.14 As one can see in Figure 1.1, the countries whose companies are most profoundly affected are the allies of the United States.

S i t e s o f C o n f l i c t  5

UK 5.02

United States 20.39

South Korea Switzerland 1.55 France NL 4.50 1.78 1.21 Germany Japan 4.73 4.29

No. of cases

Total fines

Other 3.75

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

figure 1.1. Corporate criminal fines by country of origin (in billion USD). Data source: Garrett and Ashley, Corporate Prosecution Registry, 2021.

For international relations scholars, this pattern is of ­little surprise, reflecting the structure of economic interdependence. Companies who participate most actively in the market transactions with or within the United States are necessarily more exposed to its l­egal system. What is more, interdependence provides the opportunity to strategically exploit network structures to put pressure on adversaries for strategic reasons, which Henry Farrell and Abraham Newman have theorized as “weaponized interdependence.”15 Put differently, the economy and the companies operating within it serve as a transmission ­belt for geopo­liti­cal strug­gle and global influence, a phenomenon described as “geoeconomics.”16 In a geoeconomic perspective, ­legal challenges of foreign companies can be studied as instruments of interstate conflict. In the case concerning Alstom, several observers have highlighted the links between Alstom’s l­egal b­ attle and the proposed takeover of its energy branch by the American power com­pany General Electric. Once finalized, the takeover not only strengthened the competitor; it gave the American multinational conglomerate control over the maintenance of French nuclear power plants, with clear implications for energy security.17 This book shares the geoeconomic perspective of the interdependence lit­er­a­ture. Litigation is not simply the neutral pursuit of specific charges that are ­either right or wrong. Yes, in our interconnected global economy,

100%

6  c h a p t e r 1

multinational companies can become the site of interstate conflict in pursuit of national economic interests. The extraterritorial expansion of US l­ egal reach builds on economic nodes in connected markets, and we need to study for which ends ­these are exploited. But the focus on its strategic implications or the supposed arrogance of American imperialism obscures an understanding of the nature of change and the long-­term impact that such geopo­liti­cal tactics can produce by using a ­legal form.18

How Extraterritorial Law Enforcement Leads to the Rise of Negotiated Corporate Justice Through a geopo­liti­cal analy­sis of corporate criminal prosecutions, this book seeks to show the roots of the profound institutional transformations of corporate accountability that have gone far beyond the strategic interactions in individual cases. It provides a sequential story that connects an understanding of American corporate criminal law, its extraterritorial application, and the ensuing intergovernmental tensions with a comparative analy­sis of ­legal reforms in numerous countries across the world. It argues that American extraterritorial law enforcement has triggered a clash of normative regimes across not just territorial but also sectoral lines. Managing t­ heses clashes brings to the foreground national variations in corporate liability, issues of judicial sovereignty, and sectoral challenges in domains ranging from economic regulation, fiscal oversight, health or environmental protection, and data privacy to counterterrorism or foreign policy. The result of this reshuffling is a global trend I describe as the rise of negotiated corporate justice.19 Holding corporations liable for their conduct in the global economy in a variety of settings increasingly relies on flexible new ­legal instruments that allow prosecutors to ­settle a case rather than bring it to court and seek convictions. “Negotiated justice” is a broad label that allows me to describe commonalities in the l­egal evolutions of countries from both civil law and common law traditions. Empirically, this book ­will focus more narrowly on corporate criminality, although the a­ ctual instruments and institutions in each country do not always compare neatly to corporate criminal law in the United States. Still, we can see a shared trend ­toward incentive-­based administrative approaches for dealing with corporate misconduct in global markets. In part, this evolution builds on the growing ac­cep­tance of plea bargaining in many justice systems in recent de­cades. In a detailed survey of criminal law, Langer shows that only

S i t e s o f C o n f l i c t  7

eleven countries had plea bargaining mechanisms prior to the 1970s. By 2018, of sixty countries surveyed, 93 ­percent had introduced them.20 For corporate offenses more specifically, we observe an increasing importance of settlements and other nontrial resolutions. Notable corporate prosecutions in Eu­rope that ended in such resolutions are the administrative and criminal procedures used for the Siemens cases in Germany, the patteggiamento concerning Pirelli in Italy, and the penalty notice that concluded the Statoil case in Norway.21 What is more, both common law and civil law countries have introduced nontrial resolution regimes that emulate the negotiated settlements used by the United States in recent years: the United Kingdom in 2013, Brazil in 2014, Spain in 2015, France and Colombia in 2016, Mexico in 2017, and Argentina, Japan, Peru, and Singapore in 2018.22 The names for ­these new types of settlements vary from “deferred prosecution agreement” (United States), “remediation agreement” (Canada), “effective collaboration agreement” (Argentina), or “leniency agreement” (Brazil) to “judicial agreement in the public interest” (France).23 Despite this variation, the basic features are similar and allow me to speak of “negotiated corporate justice”: they are incentive-­based instruments that provide for the administrative resolution of corporate liability questions rather than trying companies in court. In a nutshell, this book argues that the extraterritorial reach of American corporate criminal law and its geopo­liti­cal implications have led to the rise of negotiated corporate justice around the world. The strategic use of law across borders triggered a profound transformation of norms and domestic institutions abroad. The reason for this substantive change is that law is not a neutral medium that can be understood as a tool of geopolitics only, even when it is used unilaterally across borders. Contrary to other geoeconomic strug­gles, like economic sanctions or trade wars, litigation is not a border conflict that works by controlling market access. ­Legal challenges enter into socie­ties. Laws enshrine societal norms validated by domestic institutions, but they also encapsulate moral perspectives on the be­hav­ior of firms in global markets that can gain traction beyond their original ­legal system. This book sheds light on the clash in moral perspectives across territorial and sectoral lines that accompany individual cases. Even if one is keenly aware of the geopo­liti­cal stakes, it is difficult to protect domestic companies challenged in US courts by arguing in ­favor of corruption, environmental degradation, fraud, abuse of market dominance, tax evasion, or arms trading. In current investigations, governments are as much in a bind as their companies. Why did the German government not monitor its automobile industry more closely and turn a blind eye to greed

8  c h a p t e r 1

and pollution? How could technology and energy companies engage for de­ cades in such massive and widespread corruption of foreign officials? How can the competitive edge of the entire financial industry of countries such as Switzerland be built on helping foreign nationals evade taxation? Once we unravel the moral economy of corporate justice that is at stake in current conflicts, we see that f­ uture dynamics w ­ ill not be s­ haped just by who does what and why but also by beliefs about what is right and wrong.

Market Power and ­Legal Irritants To shift the focus from weaponized interdependence to longer-­term ­legal adaptation across countries allows scholars to analyze both the structural features and tools of interstate conflict and the normative order it creates. In their new interdependence approach, Farrell and Newman lay out how the central role of the United States in informational and financial networks gives them effective jurisdiction over nodes that are crucial to other market participants.24 By using this competence, they can extract information or exclude participants in ways that further their strategic interests. The jurisdictional competence they identify is indeed central but has broader consequences that are endemic to l­ egal challenges: they raise questions about, first, who is competent to judge a case and, second, which norms should be used to guide the judgment. In global markets, deciding ­these issues comes with considerable friction. In the case of corporate criminal liability, the first issue is not settled through international law in global markets. Criminal justice systems are national prerogatives, and l­ ittle case law exists on how to resolve jurisdictional disputes between states. It is therefore resolved de facto by stealth and power. In cases where jurisdictional competences are tenuous, US prosecutors have the ability to structure resolutions in ways that avoid jurisdictional challenges. Focusing on a US subsidiary rather than a foreign entity, as was done in the Alstom case, can induce multinational corporations to produce evidence, monitor compliance, and eventually sanction misconduct internally. However, the key to the success of ­these ­legal strategies is the market power of the US economy. Failure to cooperate with an internal investigation does not just have judicial consequences; the ultimate risk is exclusion from the market through the revocation of a US license, disbarment from public contracts, or freezing of financial assets. Put differently, negotiated justice relies on the credibility of threats and bargaining power in the global economy. This

S i t e s o f C o n f l i c t  9

implies a fundamental challenge to the way we conceive of the relationship between law and the economy, where normative princi­ples structure economic exchange. At the global scale, the relationship between law and the economy is inverted. Rather than creating the basis for market exchange, the effectiveness of the law depends on the distribution of economic resources. Law does not shape the market, as textbooks tell us; the market shapes the reach of law. The second issue endemic to ­legal challenges is the necessity to establish a hierarchy of norms. The friction that arises when domestic law is applied to corporate conduct abroad triggers what Andreas Fischer-­Lescano and Gunther Teubner call “regime collisions” between competing normative approaches.25 As normative regimes clash across territorial and sectoral lines, the ­legal activism inherent in the extraterritorial application of effective jurisdictional authority creates irritation. Contrasting it with the notion of a “­legal transplant,”26 Teubner refers to this phenomenon as a “­legal irritant”: When foreign rule is imposed on a domestic culture, . . . ​something ­else is happening. It is not transplanted into another organism, rather it works as fundamental irritation which triggers a w ­ hole series of new and unexpected events.27 The unexpected events this book draws attention to are institutional changes in the countries that see their multinational companies targeted by the threat of US prosecutions. First, governments everywhere do not want to stand accused of letting their own companies get away with the corruption, fraud, environmental damage, and unethical practices that US investigations have brought to light. Second, and more opportunistically, if ­these practices are to be sanctioned with considerable financial penalties, ­there is no reason the payments should go to the American justice system only. Third, governments are ­eager to reclaim judicial sovereignty over their companies and within their territory, both through domestic l­ egal reform and through more explicit multilateral efforts that spell out the rule of transborder interactions. All t­ hese ambitions require more flexible and incentive-­based ­legal instruments. In sum, the spread of negotiated justice as the principal form of dealing with corporate misconduct is thus the result of American market power in a geoeconomic world and the normative collisions triggered by the extraterritorial expansion of US corporate criminal law.

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Unfolding the Argument National l­egal systems become intertwined with the global markets in ways that have impor­tant normative implications for global capitalism: w ­ hether we consider it a good or a bad phenomenon, who wins and who loses, and how we discipline the participants in an integrated economy. Understanding ­these dynamics requires connecting dif­fer­ent evolutions that are rarely considered together: how socie­ties express aspirations of moral rectitude that should govern the global business activities of firms, how corporate criminal offenses are dealt with in the United States, the increasingly extraterritorial reach of American law, the geopo­liti­cal tensions arising from law enforcement abroad, and the diffusion of ­legal instruments across countries. This book develops each of t­ hese steps in separate chapters to provide an account of the geopolitics of corporate justice and its institutional consequences. Chapter 2 begins with a theoretical discussion of ­legal change across territorial bound­aries. Acknowledging the two-­sided nature of law as an instrument of norm inscription and an instrument of hierarchy, the chapter frames the challenges of corporate criminal law in the global economy as a case of normative regimes collision. This allows for the analy­sis of competing moral narratives on how to discipline and punish crime in world markets. Negotiated justice, the chapter concludes, represents a fundamental paradigm change away from the retributive ambitions of criminal justice ­toward a regime seeking to manage corporate conduct and avoiding the repetition of offenses. The book then discusses each of the steps that led to this paradigm change in detail. Chapter 3 begins by discussing the evolutions of the American approach to corporate criminality, highlighting in this specific case the functioning and rationale ­behind a negotiated approach. This introduction helps to see the dynamics that can generate biases and probes in par­tic­u­lar the differential treatment received by domestic and foreign firms. It shows that for a variety of reasons, foreign firms are considerably more likely to pay a fine in federal prosecutions and estimates the magnitude of the fine to be over six times larger for similar types of criminal charges. The home bias of US corporate criminal law is of global importance as the reach of American domestic law was extended unilaterally far beyond its territorial bound­aries in recent de­cades.28 Chapter 4 analyzes the development of extraterritoriality and shows that it relies on market power and the expansion of economic networks in which the United States holds a hegemonic position. The chapter also demonstrates that extraterritoriality is not just a

S i t e s o f C o n f l i c t  11

feature in the domain of economic sanctions or the fight against corruption but a sweeping development ranging from economic policy and regulation to the fight against or­ga­nized crime, foreign policy, security, and control over intelligence and data. Chapter 5 analyzes the implications of this development from a geoeconomic perspective. Drawing on the notion of lawfare, a portmanteau word created out of law and warfare, I refer to the use of ­legal instruments to gain a strategic advantage in interstate conflicts as “economic lawfare.”29 Through case studies of conflict in US relations with the EU, China, and Japan, I clarify how economic lawfare is dif­fer­ent from global law enforcement or international economic governance, in par­tic­u­lar through the unilateral imposition of l­ egal norms. This analy­sis of economic and l­ egal statecraft helps to explain how unilateral strategies influence multilateral efforts in creating normative convergence around sectoral regimes. Chapter 6 discusses the reactions in other countries to ­these challenges. A comparative analy­sis of institutional change in common law countries—­the United Kingdom and Canada—­and civil law countries—­France, Brazil, and Germany—­lays bare the incremental institutional change that I refer to as the rise of negotiated corporate justice. In a ­legal arms race to strengthen the national capacity to intervene and reinforce the domestic capacity to deal with corporate misconduct across countries, numerous countries are revising their instruments for dealing with corporate criminal liability in integrated markets. The conclusion summarizes the overarching trends and discusses the challenges of negotiated corporate justice. It highlights how law and economic interdependence work together in managing conflict in global markets but also points to the shortcomings of the emergent paradigm. Repeated outrage over corporate scandals and over the inadequacy of punishment highlight that the most impor­tant challenge for corporate justice is the cohesion of liberal demo­ cratic socie­ties.

2 The Moral Economy of Corporate Justice

in 2008, the soothing landscapes of the Alps became the battleground in a fight over financial mobility, the eighty-­year-­old tradition of banking secrecy in Switzerland, and massive tax evasion.1 Enshrined in the Swiss Banking Act of 1934, strict client-­bank confidentiality was the cornerstone of the financial industry in the country, supported by the majority of po­liti­cal parties and upheld in a popu­lar referendum in 1984.2 UBS AG, the largest Swiss bank and the global leader when mea­sured by assets u­ nder management, had l­ ittle reason to think that this would change when it came u­ nder scrutiny from the US Department of Justice and the tax authority IRS. To be sure, US-­Swiss relations had been strained over differing interpretation of existing tax reporting requirements. Following revelations from a whistle­blower, UBS was in the spotlight. Bradley Birkenfeld, a se­nior UBS banker between 2002 and 2005, had provided an explosive deposition on practices encouraged by his former employer, including the details of smuggling diamonds in toothpaste tubes and deliberately destroying offshore bank rec­ords, acts that ­were undertaken in an effort to maintain UBS’s lead in managing a staggering $20 billion of assets owned by wealthy US citizens.3 US authorities accused UBS of conspiring to defraud the IRS by setting up shell companies to shield the identity of American account holders, arresting a UBS wealth man­ag­er at a Miami airport in April 2008. In a hearing of the US Senate’s Subcommittee on Investigations, UBS admitted responsibility and promised to investigate what they considered wrongdoing by a rogue client man­ag­er. They argued that the use of intermediary structures—­the questionable shell companies set up by the bank on behalf of US clients—­ was perfectly l­egal ­under US law. Frustrated with the response, judged as 12

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insufficient cooperation, the Department of Justice requested the names of all US clients that held such accounts so that they could be prosecuted and fined. UBS was caught between a rock and a hard place. Swiss law distinguishes between tax fraud—­a criminal offense based on forged documents—­and tax evasion—­a civil offense in which clients fail to declare income. Contrary to tax evasion, violating banking secrecy was a criminal offense, and Swiss authorities immediately signaled their opposition to the Department of Justice’s request. UBS had the option of violating Swiss banking law and being criminally liable in Switzerland or denying the American request and facing criminal prosecution in the United States. It de­cided to ­settle through a deferred prosecution agreement, delivering 150 client names, while the IRS requested information of fifty-­two thousand further account holders. The tumultuous negotiations between US authorities, UBS, and Swiss authorities continued. Amidst US-­Swiss administrative cooperation and an IRS amnesty program for voluntary disclosure from US clients, the Department of Justice indicted several UBS executives.4 In 2011, the Department of Justice announced that it was targeting twelve other Swiss banks, including Credit Suisse and Wegelin as well as Swiss cantonal banks with state guarantees, adding charges against high-­ranking executives several months l­ater. In January 2012, the Department of Justice increased pressure by indicting Bank Wegelin, Switzerland’s oldest bank as well as one of its most prestigious banks. In less than two weeks, the bank was forced to close down.5 The shockwaves sent from this bankruptcy brought Switzerland to its knees. The country approved ­legal changes to unravel banking secrecy, entered into a bilateral agreement with the Department of Justice to allow Swiss banks to ­settle individual deferred prosecution agreements, and signed the US Foreign Account Tax Compliance Act in 2013.6 The demise of Swiss banking secrecy was the result of their banks being caught in the crossfire between two ­legal settings with no international court to review their case. Markets may be global; ­legal systems are not. Politics, law, and morality are still predominantly linked to nation-­states, despite an increasingly dense web of transnational networks and ­legal hierarchies, in most cases for specific regional or sectoral cooperation and conflict resolution.7 Integrated markets provide ample opportunity for the clash of moral conceptions enshrined in dif­fer­ent ­legal regimes, leading to intensive normative debates about the role of businesses in global markets and their social and environmental responsibilities. How are ­these conflicts resolved?

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The Swiss story begins with conflicting instructions on corporate criminal offenses in two l­ egal settings: the violation of banking secrecy in Switzerland on the one hand and the facilitation of tax evasion in the United States on the other. In the absence of international law on the hierarchy between the two and with diplomatic pro­gress judged insufficient by the US administration, the unilateral enforcement of American corporate criminal law set off a series of institutional reforms that would have been unthinkable de­cades ­earlier. The veil of banking secrecy, once the cornerstone of Swiss economic identity, was pierced by US ­legal actions, which eventually led Switzerland to make similar concessions multilaterally within the OECD and the Eu­ro­pean Union.8 In October 2018, the Swiss administration began routinely exchanging bank account data with tax authorities in other countries. It is pos­si­ble to explain the demise of banking secrecy in several ways. A first explanation points to power politics and the defense of American interests. But this does not tell us why this par­tic­u­lar push led to the fall of the national institution when previous conflicts around insider trading, money laundering, and dictators’ financial assets had not.9 A second explanation centers on the rise of multilateral sectoral regimes on tax fraud and evasion, but convergence on the idea of tax transparency in ­these settings came only ­after the American ­legal actions against Swiss banks. A final perspective, and the one developed in this chapter, highlights the par­tic­u­lar nature of l­ egal action in bringing about normative clashes that need to be resolved. The extraterritorial use of corporate criminal law pitted not only US against Swiss interests but also liberal financial regulation against beliefs about tax justice and wealth management. Within Switzerland, not all po­liti­cal parties w ­ ere favorable to banking secrecy.10 As information about the corporate conduct of major Swiss banks was revealed through US ­legal actions, numerous stakeholders within Switzerland became uncomfortable with being shamed as one of the world’s major tax havens. A regime collision approach therefore helps to see how unilateral ­legal actions, in this case through US corporate criminal law, can trigger far-­reaching changes in domestic values and institutions. The purpose of this chapter is to make sense of the evolution of ­legal tools and normative categories by considering theoretical approaches to the circulation of law. Discussing the two-­sided nature of law as a tool of power and an instrument of norm inscription, it shows how power politics and normative change are connected. In the global economy, unilateral l­egal action can be both an instrument of interstate conflict and a challenge to beliefs about right or wrong that have lasting effects.

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To study t­ hese mechanisms, this chapter pre­sents theoretical perspectives on ­legal change across bound­aries and lays out three dif­fer­ent accounts of the current transformation of global corporate justice: (1) power politics, (2) convergence, and (3) normative collisions. The second section prepares the comparative empirical analy­sis of the book by providing a brief overview of ­legal traditions in criminal justice and dif­fer­ent approaches to corporate criminal liability. The focus on corporate criminal law enables discussion on the issues that are most affected by deeply rooted beliefs about societal cohesion and well-­being. Contrary to international business regulation, moral judgments about crime and punishment remain nationally situated. The third section then examines what happens when mobile business activities and situated beliefs collide. It pre­sents dif­fer­ent narratives about corporate accountability in world markets and argues that the interconnected nature of the global economy led to a paradigmatic shift ­toward negotiated corporate justice.

­Legal Change across Bound­aries Globalization, defined as the increase of exchanges across borders all over the planet, is not just an economic phenomenon. A common ste­reo­type about markets is that they require l­ittle public intervention to function properly, as the imagery of an “invisible hand” suggests. In real­ity, we see the opposite: “freer markets, more rules.”11 Global economic integration quickly brought with it a call for “more law.” A wealth of scholarship in law and international relations has examined l­egal integration, the “global expansion of judicial power,” and the “legalization of world politics.”12 How do l­ egal concepts evolve and move across borders? Let us consider dif­fer­ent ways of studying this question, before discussing the mechanisms driving the circulation of law.

Four Approaches For centuries, law has been tightly associated with the po­liti­cal logic of the nation-­state, since it has the coercive authority to enforce the law. National ­legal ­orders corresponded to territorial jurisdictions, with an integrated court system guaranteeing ­legal unity. International law, in this classic perspective, is then simply a set of formalized agreements between ­these sovereign countries.13 It emanates from their own ­free ­will and undergoes po­liti­cal ratification before taking effect.

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But law does not just travel upward in such a national and territorial perspective; it can also move from one country to another. Following Watson, ­legal scholars speak of “­legal transplants” to analyze how foreign laws are imported and adapted to new contexts and ­whether they fit with the social setting in which they are received (or ­whether a connection between law and society is necessary in the first place).14 Summarizing the l­egal lit­er­a­ture, Twining identifies a dominant “naïve model of diffusion,” rooted in “country and Western” perspective, where l­ egal rules or institutions travels from one country to another through formal adoption.15 In ­these bilateral relationships, the distinction between dif­fer­ent national ­legal cultures is central. The question asked is how a concept is moved from one l­egal setting to another, an institutional innovation that has been labeled “transfer” in the policy lit­er­a­ture.16 With the increasing complexity of the ­legal architecture at the global level, this territorial perspective has been put into question. Law is no longer just the confine of nation-­states, as classic international public law suggests. Rather, a multitude of sectoral regimes have grown to address public and private concerns.17 Although some international private law regimes such as Merchant Law date back to medieval times, the spread and differentiation of sectoral regimes has increased rapidly in recent de­cades, adding to a wealth of regional supranational fora. The most developed supranational regime is certainly the Eu­ro­pean Union, but many ­others exist. At the turn of the twentieth ­century, the Program on International Courts and Tribunals lists 125 international institutions in which in­de­pen­dent authorities reach legally binding decisions.18 Fragmented, overlapping, and sometimes in contradiction, this web of jurisdictions creates frequent encounters and frictions across l­egal settings. International relations and law scholars have indeed called attention to the nested judicial structure under­lying this multitude of transnational regimes.19 This interconnected world allows for the circulation of agents and ideas in ways that have lasting effects on the developments in each country. Analyzing the transnational dynamics in this context is at the heart of the diffusion lit­er­ a­ture, which focuses on the structural mechanisms inducing change in seemingly distant l­ egal settings. Explanation for diffusion can range from the spread of norms and ideas through expert communities or convergence induced by competition between countries seeking to attract investment to the imposition of norms through po­liti­cal coercion.20 Diffusion is in fact a pervasive phenomenon continuously shaping the evolution of specific ­legal o­ rders.21 Schematically, one can distinguish between approaches to studying the evolution and movement of ­legal concepts across borders by two ele­ments

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­table 2.1. Perspectives on the circulation of law Territorial

Sectoral

Global

international law  = intergovernmental negotiation

­legal regimes  = expansion and collision

Transnational

transfer / transplants  = import of ­legal concepts

transnational diffusion  = convergence of norms

(­Table 2.1): ­whether they adopt a territorial or sectoral analy­sis and ­whether they focus on the upward movement, i.e., the integration of law at the global level, or horizontal movement from one country to another. Each perspective sheds light on dif­fer­ent pro­cesses by which law crosses bound­aries. The pro­cess central to traditional international law is intergovernmental negotiation. ­Legal transplants analy­sis focuses on the agents and conditions of successful export and import of concepts and tools across borders. The transnational diffusion lit­er­a­ture analyzes the structural features facilitating the convergence of practices and, ultimately, norms. The rise of global ­legal regimes, fi­nally, reveals the structuring of multiple l­egal authorities, which inevitably creates friction when regimes collide. The empirical discussion in this book ­will focus on ­legal change in global markets that is not governed by international law. In line with l­egal regime theory, it argues that change arises from the friction between national and sectoral regimes, which in turn can facilitate transnational dynamics.

Three Mechanisms The four approaches are characterized by their units of analy­sis and the type of l­ egal evolution they study. Even though they draw our attention to a variety of pro­cesses, they do not speak to the mechanisms that trigger and drive ­legal evolution. In fact, the lit­er­a­ture is quite divided on this question with heated debates about the role of coercion, incentives, and social norms. In the following, let us consider arguments about (1) power, (2) rational self-­interest, and (3) the social construction of shared ideas and normative beliefs. (1) Power is a central concept in l­ egal theory. Weber and Durkheim cast the rule of law as a feature of bureaucratic rationality or as a necessity for social cohesion that ultimately aims to protect individuals against the arbitrary use of power.22 For ­others, law is the tool of the power­ful used for shaping society

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in their image.23 In practice, the first view—­a neutral conception of the law—­ underlies bureaucratic formalism ­free from governmental interference. The second—­a po­liti­cal conception of law-­making—is vis­i­ble in the institutions of the Common Law systems, which allow for popu­lar input into the judiciary, for example through the election of judges. A broad debate tries to locate variation between the two extremes—­neutrality vs. domination—by examining the degree to which social and po­liti­cal arrangements shape the rule of law.24 When it comes to global or transnational circulation of law, similar divisions shape the discussion. In the international relations lit­er­a­ture, “realists” oppose “liberal institutionalist” accounts.25 Realists consider that all cooperation between states, including international law, are marked by the pursuit of power, while neo-­liberal institutionalists believe that institutions, once created, have an in­de­pen­dent effect on state be­hav­ior, in par­tic­u­lar by shaping incentive systems.26 ­Legal scholars like Eric Posner warn against naïve attempts to create an international rule of law, arguing that adjudication cannot be disconnected from global power politics and states w ­ ill always dispense with ­legal constraints when it goes against their self-­interests.27 In a similar vein, scholars of sectoral regimes call attention to the power politics guaranteeing institutional success.28 Horizontal transfer and diffusion of law can also be triggered by power relations, e­ ither outright domination, for example through colonial rule, hegemonic rule supported by international institutions and in a less vis­ i­ble form, hegemonic ideas.29 (2) Rational self-­interest features prominently in economic analy­sis of ­legal change as well as international relations scholarship on global incentive systems. In opposition to realist scholarship, liberal institutionalists have argued that international rules create a system of incentives that ­will have lasting effects on the be­hav­ior of nation-­states. Inspired by micro-­economic reasoning and game theory, this lit­er­a­ture analyzes the creation of supranational ­legal ­orders and sectoral regimes as an attempt to create credible commitments that ­will transform the rational self-­interest of countries and make global politics less anarchic. Such arguments underlie cap­i­tal­ist peace theory, analyses of Eu­ ro­pean integration, or explanations for sectoral regimes on a variety of issues.30 In this perspective, international l­ egal integration is a way for governments to “tie their hands” and shape the incentive systems of cooperation in the f­ uture. Similarly, horizontal transfer and diffusion can be triggered by economic incentives that make the import or harmonization of ­legal standards desirable. Competition between countries features prominently in such rational narratives, for example regulatory competition putting pressure on governments to

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adapt their laws to t­ hose abroad to attract investment and retain mobile companies.31 All of ­these accounts assume ­legal change to hinge on the ­free w ­ ill of governments seeking to maximize their utility, in many cases gauged in terms of economic growth. (3) Social construction accounts share a so­cio­log­i­cal perspective interested in the institutionalization of shared beliefs and norms, mechanisms of learning, and institutional emulation. Sociologists have long been interested in the gradual formation of a “world society” and more specifically, the mechanisms that led to a convergence in worldviews and shared beliefs about legitimate ends and appropriate means, for example about ­human rights, education, market exchange, or security.32 Social constructivists working in this tradition in international relations highlight the role international and non-­governmental organ­ izations played in institutionalizing such norms, circulating change agents, and creating epistemic communities.33 Similar mechanisms are at work in transnational diffusion through the incremental spread of l­egal reasoning, bringing about the convergence of vocabularies, techniques, and institutions.34 In comparative analy­sis, this raises the question of how ideas influence l­egal and po­liti­cal legacies, an issue that has led to an extensive debate about learning and paradigm change.35 In a seminal article, Peter Hall defines social learning as “a deliberative attempt to adjust the goals and techniques of policy in response to past experience and new information.” He insists that such a transformation can only be understood by distinguishing between three levels: overarching goals, techniques or instruments employed to attain ­those goals and the precise setting of ­these instruments.36 Complete paradigmatic change refers only to the former, and occurs in the socio-­political realm, where public authorities are trying to respond to a series of anomalies and puzzles produced by an old paradigm. Such tensions or anomalies can be brought about by external developments, the circulation of experts, but also by what Fischer-­Lescano and Teubner have labeled “regime collisions.”37 Drawing on structural sociology and in par­tic­ul­ ar the work of Nikolas Luhman, they argue that sectoral regimes are marked by dif­fer­ent rationalities: a trade regime reasons in terms of fair competition, international health regimes in terms of public health, environmental regimes focus on the protection of life on our planet, ­etc. ­These logics are incommensurable and no global system of dispute resolution between international regimes exists to this date. The fragmented nature of global justice therefore creates frequent collisions between norms that w ­ ill increase the conflictual nature of our interconnected world. Importantly, the normative expectations of sectoral regimes have been generated and become juridified within their

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respective domain—­science, health, environment, education etc.—­and do not correspond to the territorial limits of nation-­states, as po­liti­cal as their evolution may have been.

Understanding the Transformation of Global Corporate Justice What dynamics are we currently observing in the transformation of global corporate justice? Using the frameworks discussed above, three dif­fer­ent readings are pos­si­ble: (1) an account of aggressive US imperialism based on ­legal tools, (2) a story about the convergence of ideas and l­egal practices that can be described as Americanization, or (3) a dynamic triggered by regime collisions that create normative frictions and conflict not just between but also within countries and are managed through institutional change. Let me develop each before siding with the third perspective. The first “power politics” analy­sis centers on the aggressive US strategy of criminal prosecutions beyond its territory. It highlights the po­liti­cal coercion exerted on foreign states through litigation against their companies. L ­ egal norms play hardly any role in t­ hese accounts. With vocabulary from warlike confrontation, power politics imply that law is instrumentalized to serve the imperial ambitions of the United States in the world. Economic lawfare describes the new nature of economic war, where law becomes a “weapon,” a series of “­battles” are “lost,” as one can learn by getting “news from the front lines.”38 As in all interstate conflict, the ultimate objective is therefore to defend oneself, reestablish sovereign rule over one’s territory (in this case judicial sovereignty), and possibly even retaliate. The second perspective provides a more benign account of the l­egal adaptation introduced in a variety of countries. Analyzing changes in corporate criminal law in each setting, t­ hese accounts highlight the import of US ­legal techniques and instruments as models for institutional reform. They show, for instance, the spread of deferred prosecution settlements into ­legal contexts that previously did not have them or compare the steady rise in the level of financial sanctions in corporate criminal affairs, sometimes speaking explic­itly of “Americanization.”39 I w ­ ill regroup such accounts u­ nder the label “convergence” to characterize a pro­cess of diffusion of l­egal practices and possibly norms. Contrary to power politics accounts, convergence studies are less concerned about the power equilibrium in international affairs. In line with transplant and diffusion accounts, they are more interested in the evolution of l­egal norms and techniques. Some authors even salute the extraterritorial application of US law as

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an opportunity to harmonize and strengthen international economic law.40 While the first narrative is conflictual and territorial, the second highlights incremental institutional adaptation in a problem-­centered manner. ­Legal regime theory provides us with a third perspective centered on sectoral rationalities and the collision of normative ­orders in a multilayered setting. ­These “normative collisions” are highly conflictual, but not just along territorial lines. Beyond geopo­liti­cal tensions, they also pit beliefs about acceptable corporate be­hav­ior, humanitarian needs, and social and ecological challenges against one another. In ­doing so, the ­legal encounters can create what Hall has called “anomalies” that cannot be resolved within traditional conceptual frameworks.41 As a consequence, geopo­liti­cal tensions over US extraterritorial law can result in both national institutional change and the expansion of sectoral ­legal regimes. At the national level, what may look like a ­simple ­legal transplant is actually a “­legal irritant.”42 As Teubner outlines, such institutional transfer creates friction in the domestic ­legal and socioeconomic order and thus leads to an evolutionary dynamic. This turbulent pro­cess is idiosyncratic and rarely leads to a s­ imple convergence of norms. Rather, the search for a new normative equilibrium w ­ ill vary across sectors and domains and is likely to create new cleavages between participating stakeholders. It is this sequential story of normative collisions that ­will be provided in this book.

­Legal Traditions and Corporate Criminality Corporate liability is a vast topic covered in corporate, administrative, and criminal law at the national and international levels. To keep the empirical and comparative discussion manageable, this book zooms in on corporate criminal law. Our focus is thus on substantial misconduct within companies that is considered a threat to the well-­being of society. This section pre­sents the most impor­tant differences in ­legal traditions and approaches to corporate criminal law across countries. It begins with a brief overview of comparative ­legal traditions, criminal law, and the stakes in corporate criminal liability to help situate the more detailed accounts that ­will follow in ­later chapters.

­Legal Traditions The difficulty with comparative socio-­legal studies is that t­ here is “too much law to study,” as Robert A. Kagan once noted.43 ­Legal innovation is constant, and the domains covered by law are multiplying. The appeal of l­ egal guidelines

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in solving conflicts is strong, and we observe an increasing politization of law, so much that Ran Hirschl speaks of the rise of “juristocracy.”44 To navigate this fluid setting, it is helpful to consider what comparative scholars have identified as ­legal traditions or ­legal families. Although vari­ous classifications exist in comparative scholarship, most identify some variants of the following l­ egal traditions: civil law, common law, religious law, and customary law.45 Civil law refers to the traditions rooted in Roman law, where the body of law is codified in a constitution and statutes passed by legislature. Oftentimes, the civil law tradition is further subdivided into a Romanistic ­family drawing on the Napoleonic Civil Code, a Germanic ­family influenced by the German Bundesgesetzbuch of 1900, a Nordic f­ amily grouping the Scandinavian countries, and a Far East f­ amily in China and Japan, which is a mixture of civil law and eastern l­egal traditions. Rus­sia and the countries of the former Soviet Union ­were traditionally classified as a category entirely dif­fer­ent from the civil law tradition, e­ ither as socialist law or as po­liti­cal law.46 The common law tradition groups all countries tracing their l­ egal development back to En­glish law spread throughout the British empire. In common law, the primary source of law are judges deciding on cases. Common law, the body of law made up of pre­ce­dents, stands on an equal footing with statutes and regulations produced by the legislature and executive branch. Common law countries are distinct from civil law countries in not only the historical origins and sources of law but also the l­ egal reasoning. In the civil tradition, reasoning begins with the l­egal codes and then argues scholastically and deductively, while common law requires a forensic, inductive approach interested in past practices and interpretations.47 Religious law comprises all countries using a religious document as source of law, such as the Islamic l­ egal system of Sharia or Jewish Halakha. Fi­nally, customary law refers to countries where rules are created through oral transmission, memory, and narratives.48 Many if not most countries in the world are mixed systems, influenced by a variety of traditions. From the perspective of world history, Patrick Glenn suggests that ­legal traditions should be understood as a complex set of ideas and norms with a relatively stable core but fluid bound­aries that remain in continuous and reciprocal interaction.49 Recognizing that “all ­legal systems are mixed,” Esin Örücü proposes to group them “according to the proportionate mixture of the ingredients” and classify them according to parentage into f­ amily trees.50 This allows studying encounters between l­ egal systems by considering the differences along two lines: socio-­cultural and ­legal resemblance. Indeed, critical ­legal studies have underlined that comparative law has to consider the

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socio-­cultural setting to understand how institutions and ­legal texts produce ­legal order.51 This focus on law in action rather than law on the books is at the heart of socio-­legal studies. Acknowledging that law is a body of institutionalized rules that coexists with other societal norms, socio-­legal studies analyze ­legal traditions to understand a deeply po­liti­cal phenomenon, namely public authority, “the structures by which the state shapes society.”52 Kagan’s work on the American ­legal system provides a particularly useful heuristic for cross-­country analy­sis. To characterize modes of governance and dispute resolution, he distinguishes informal and formal decision-­making on the one hand and the organ­ization of authority as e­ ither hierarchical or participatory on the other. The ideal type of formal and hierarchical decision-­ making is “bureaucratic legalism,” the aspiration of a Weberian rationality common in civil law countries. Formal participatory decision-­making is what Kagan identifies as “adversarial legalism,” the essence of the “American way of law.” In this category, policymaking and dispute resolution relies on ­legal contestation between competing interests and litigant activism, where the assertion of claims, search for l­ egal arguments, and evidence are dominated by the parties rather than judges. Both formal modes have their informal equivalent, a hierarchically or­ga­nized “expert or po­liti­cal judgment” and a participatory “negotiation/mediation.”53 Although the ideal types of formal governance reflect the division between civil law and common law, Kagan argues that “adversarial legalism” is particularly distinctive of the United States, rooted in an American po­liti­cal culture that is “deeply mistrustful of concentrated economic as well as governmental power.”54 Through its participatory nature, it aims to empower every­body to hold the ruling class accountable and protect individual rights. At the same time, it relies more on prescriptive laws, costly adjudication, and more severe penalties than other countries, including other common law countries.55 Since the first publication of Kagan’s book in 2003, scholars have discussed ­whether and to what extent adversarial legalism has moved abroad.56 Although most authors insist on the distinct nature of ­legal conflict in Eu­rope or Asia, they do note the rise of formal l­ egal disputes and a push t­ oward transparency that empowers a broad range of po­liti­cal interests to challenge bureaucratic and corporate misconduct.57 The debate is relevant for the evolution of corporate criminal law, but with some caveats. Within Eu­rope, criminal law is not a competence of the Eu­ro­pean Union but of its member states. The transformation we observe therefore must be understood as national institutional change more than a Eu­ro­pean dynamic. Across the globe, criminal law is

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deeply rooted in conceptions about societal offenses and appropriate punishment publicly enforced through prosecutors. Corporate criminal law is thus a precious win­dow on beliefs held within society about wrongful business conduct.

Criminal Law Criminal law covers all offenses perceived as threatening or harmful to society. It prohibits conduct that endangers the health, life, property, and moral welfare of p­ eople. Mostly established by legislative acts, it includes punishment and methods of rehabilitation. Contrary to civil and commercial law, it does not focus on dispute resolution between two private parties through compensation. Criminal offenses always entail a threat to the well-­being of society as a ­whole. As criminal law is rooted in shared notions of appropriate be­hav­ior and adequate punishment, criminal offenses are usually greeted with moral outrage.58 Criminal law doctrine varies according to ­legal traditions. In common law countries, a crime divides into actus reus and mens rea, a guilty act and a guilty mind, i.e., a physical ele­ment establishing the material real­ity of an offense and a ­mental ele­ment establishing the subjective dimension of intent. The Germanic tradition distinguishes among the material real­ity of the offense, its illegality, and its guilt, similar to the French tradition, where classical doctrine distinguishes among the material, ­legal, and moral ele­ments of a crime. Chinese and Rus­sian criminal law adopt yet another paradigm based on four ele­ ments: the characteristics of the offender, guilt/criminal intent, the criminal act, and a more abstract notion of the object threatened by the crime. Across countries, we see considerable variation in the type of acts that are covered by criminal law as well as in the sentences. The ­actual enforcement, the nature and severity of the sentences—­from fines and imprisonment to corporal and capital punishment—­can also be strikingly dif­fer­ent.59 Moreover, criminal justice in all countries f­ aces a perennial prob­lem of control over t­ hose charged with law enforcement, one of the most vital coercive powers delegated by the state. Oversight over the guardians can be assured through rule of law and demo­cratic accountability. Building on Mirjan Damaška, Kagan suggests that the organ­ization of control in hierarchical and participatory or coordinated ­legal systems differs in ways that reflect the central fears each seeks to address.60 A centralized hierarchical system is designed to ensure consistency and minimize bias in the application of criminal law. It

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attempts to guard against corrupt law enforcement, parochial influence, or plain incompetence at the local level. Through the structure of bureaucratic rationality and demo­cratic accountability at the top levels of management, centralized law enforcement seeks to correct individual decision-­making through the rational rule of law. Inversely, coordinated systems are structured to guard against government abuse of power, fearing that it could use the criminal code as a tool for repression. To prevent such malfeasance, the po­liti­cal and ­legal structure is more fragmented, with po­liti­cally in­de­pen­dent l­awyers empowered to dispute the government’s evidence and defend individual liberties. Most of continental Eu­rope and Japan lean t­ oward the hierarchical model, Kagan writes, “while the criminal justice systems of the United States approximate the coordinate model, and far more so than its British, Canadian and Australian cousins.”61 In a cross-­national perspective, the po­liti­cal culture of the United States and the institutions that resulted from it created an adversarial criminal justice system that is far more punitive, cumbersome, inconsistent, unequal, and volatile, he writes, “perpetually enmeshed in po­liti­cal and ­legal challenge.”62 This is reflected in both the unusually high incarceration rates in the United States as well as the per­sis­tent and unequal use of capital punishment across states.63 To sum up, this overview shows that criminal law is s­ haped and evolves primarily within the national po­liti­cal realm, with the exception of the gravest ­human rights and international humanitarian law violations, which are dealt with ­under international criminal law.64

Corporate Criminal Law Corporate criminal law, the framework for prosecuting a firm for a criminal offense, raises additional questions that need to be settled: Can a com­pany commit a crime? Is it appropriate to consider a collective ­human enterprise like a person, even if it is nothing more than the ­women and men it brings together? If so, how does one establish criminal intent, and who should be held accountable for an offense committed by a collective entity? Baron Edward Thurlow, Lord High Chancellor of G ­ reat Britain from 1778 to 1783, is credited with observing that corporations have “no body to kick, no soul to damn.”65 A corporation cannot be put into jail to serve a sentence for its wrongdoing, nor does it have a guilty conscious that features centrally in criminal procedures. Attributing ­legal personhood to companies—­“as if ” the collective is more than just the sum of its parts—­follows a rather specific

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reasoning that has evolved over time and is much debated in the ­legal profession.66 Hans Kelsen underlines that treating corporations as juristic persons is an auxiliary mea­sure allowing a l­egal order to attribute rights and obligations to a complex organ­ization in a relatively s­ imple manner by means of personification. However, it is fictitious, since the content of ­these rights and obligations always describes the rights and obligations of individual ­human beings.67 The anthropomorphic imaginary of corporate personhood is frequently used in the United States to shield companies against government infringement, just as it is criticized for giving disproportionate rights to corporations, for example in po­liti­cal campaigns.68 At the other extreme, the fictitious nature of corporate personhood is one of the major obstacles to corporate criminal law in Germany, for instance, where l­ egal scholars argue that the notion of Schuld (guilt) is ill suited for a collective subject.69 Although calls for a corporate criminal code are growing in Germany, companies are currently sanctioned ­under the German Act on Regulatory Offenses (Ordnungswidrigkeitengesetz) in serious cases combined with criminal prosecution of individuals.70 All ­others Eu­ro­pean countries have a­ dopted corporate criminal laws, albeit as a more recent phenomenon. France, for example, introduced corporate criminal liability during the revision of its criminal code in 1994.71 This stands in contrast with older corporate criminal laws in common law countries, developed in the early twentieth ­century.72 In almost all cases, corporate criminal law evolved in reaction to scandals and controversies surrounding offenses committed by specific firms. Devising and strengthening the ­legal toolkit to deal with companies directly can arguably serve dif­fer­ent functions. The first is s­ imple retributive justice: if harm has been done, it should be punished. Companies are real agents in socio-­economic life and should be dealt with as such. As a criminal liability rationale, Albert Alschuler compares this “expressive retributivism” to historical examples where the law provided for punishing animals or inanimate objects responsible for ­human death.73 A second purpose of corporate criminal law is disciplinary, insisting on the behavioral effects a criminal procedure can have on a collective entity. As in collective punishment, where every­body in a group is sanctioned for the wrongdoing of one of its members, the purpose ­here is to provide incentives for individual members in the group to monitor each other and thus prevent offenses.74 A third purpose is communicative: it allows prosecutors to place blame on an organ­ization, creating a reputational effect that is associated with the entity rather than individual members. The blaming function recognizes

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that orga­nizational dynamics can have an effect on individual be­hav­ior. Indeed, “an organ­ization’s role in its agent’s bad act is often evaluated with a moral slant characteristic of judgments of criminality.”75 To this day, we see per­sis­tent disagreement among ­legal scholars about the purpose of corporate criminal liability, including calls to abandon or replace it, for example with corporate ethics standards.76 ­Others insist on the need for corporate criminal law, even if its concrete functioning can be improved.77 A testament to the need for a framework that goes beyond civil liability, they argue, is the fact that most Western countries have ­adopted corporate criminal laws in recent de­cades. To summarize, criminal law has particularly salient moral undertones and thus varies widely across countries, even within the ­family resemblances that one can trace back to dif­fer­ent ­legal traditions in common law and civil law countries. What is more, the adversarial ­legal culture of the United States makes criminal law more punitive, cumbersome, and unequal than most other countries even within the common law tradition. This also affects corporate criminal law, a domain that f­ aces additional challenges due to the fictitious nature of corporate personhood. How and if the contested ele­ments of corporate criminal law travel across borders is therefore an insightful case study in the global circulation of law: multinational corporations are among the most mobile agents in the economy, while moral judgments about crime and punishment remain nationally rooted. The following section ­will examine what happens when the two collide by analyzing dif­fer­ent narratives about corporate criminal responsibility and accountability in global markets.

Moral Economies It is pos­si­ble to identify several perspectives on corporate justice in global markets. Corporate justice refers to conceptions about responsibilities and moral obligations to ensure that corporate decision-­making is fair, civil, just, and accountable.78 Global capitalism is inextricably linked to the activities of large companies seizing the opportunities of integrated markets abroad. What are their obligations to society? How can t­ hese companies be held accountable for the serious harm produced by their operations? Th ­ ese questions about the role of business in global markets and its social and environmental responsibilities concern the companies themselves, their shareholders, their stakeholders, and public decision-­makers alike. The following section ­will discuss dif­fer­ent moral economies of global corporate justice.

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Studying moral economies helps to shed light on regimes of justification and legitimacy of economic activity, with a large spectrum of implicit and explicit norms.79 It helps us to understand how specific groups of p­ eople value and judge the global economy and evaluate the actions of ­those who participate. If economy refers to a system for producing, distributing, and managing resources, adding the adjective moral implies an investigation into the social values and obligations that shape and constrain economic interactions. The term moral economy has become fash­ion­able in recent years in analyses that ­were interested in the non-­market notions of social justice that structure the economy.80 Dif­fer­ent visions of normative o­ rders abound in economic life, indicating who abides by their moral obligations and who does not play by the rules: the lavish and the frugal, the corrupt and the honest, the lazy and the industrious, the greedy and the generous.81 Even in the most market-­oriented socie­ties, not all profit is legitimate, not all assets desirable, and not all wealth accumulation ­legal. In line with the original use of the concept by E. P. Thompson, studying moral economies implies a contextual analy­sis, as values and norms always apply to specific contexts and identifiable groups or stakeholders.82 If Thompson’s analy­sis of the En­glish crowd was interested in traditional consensual values that ­were swept away by market forces, economic sociologists ­today insist that social values underpin market forces and produce tensions around their borders, as purposive rationality coexists with value-­based considerations.83 The objective of this section is to tease out dif­fer­ent narratives of the ways in which corporations are (or should be) punished for misconduct. I argue that we have moved from a narrative that considered multinational companies in integrated markets to be largely above the law to two competing understandings of the current rise in corporate criminal liability: one that welcomes the growing reach of law over business and another one that is concerned about the mechanism of corporate justice across borders.

Multinational Companies Above the Law Since non-­market notions of social justice are enshrined in national institutional o­ rders, an impor­tant criticism of “corporate-­led globalization” in the 1990s and 2000s was its inability to assure the social and ecological accountability of multinational companies.84 In integrated markets, according to this critique, multinational companies are uniquely positioned to escape the control of nation-­states.

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First, they are more mobile than workers or other stakeholders and can threaten to leave. This creates incentives to shape economic conditions increasingly in f­ avor of corporate interests by downgrading regulatory requirements, providing financial and tax incentives, and shifting labor-­relations. The ensuing regulatory competition between jurisdictions can create a downward spiral, a much-­decried “race to the bottom.” 85 Second, multinational companies have the possibility to engage in jurisdictional arbitrage: they can select the most advantageous rules in case of a disagreement between competing jurisdictions. Unlike the first mechanism, which entails the threat of exit by physically moving out of a regulatory setting, the second mechanism does not necessitate moving operations. Rather, it involves the use of l­egal experts to seize the possibilities and loopholes created through overlapping ­legal regimes and jurisdictions.86 This strategy has been at the heart of the debate over tax avoidance, where companies firmly established in major production and consumption centers declare a substantial part of their profits in tax havens such as the Netherlands, Ireland, Bermuda, the British Ca­rib­bean, and Singapore.87 In a perfectly ­legal but morally questionable way, the tech g­ iant Amazon is suspected to have paid zero taxes in two consecutive years despite profits of well over $10 billion.88 Through jurisdictional arbitrage and the technical work of private l­awyers, large companies have a considerable advantage in shifting and protecting their assets from governmental control.89 Thirdly, multinational firms have resources that create substantial po­liti­cal inequalities. On the one hand, their wealth leads to continued suspicion that they can gain access to politics and influence decision-­making more easily than other societal stakeholders.90 On the other hand, their business operations can affect the structure of a country’s socioeconomic order, as governments rely on their goods and ser­vices. This structural power is particularly high in industries that provide platforms connecting p­ eople and their activities, such as information technologies, payment systems, energy, and transportation.91 Domestically, politicians ­will shy away from coercive mea­sure that can result in shutting down social media, disrupt financial flows, or reduce the availability of network ser­vices, which is why energy companies, the financial industry, and, lately, the tech ­giants are suspected to be beyond po­liti­cal reach. Dependence on corporate activities is thus an impor­tant reason why large corporations are suspected to receive favorable treatment beyond lobbying influence or the s­ imple but equally impor­tant effect of their business operations on employment and prosperity.92

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To summarize, multinational companies are portrayed as the winners of market integration, reaping much of the benefits of openness without an equal commitment to their social and environmental responsibilities. The visibly unequal treatment between large multinational and small businesses, companies and workers, corporate interests and other social and po­liti­cal objectives has been criticized not just by the antiglobalization movement but also by a variety of observers from all stripes of the po­liti­cal spectrum, calling for the reining in of excessive corporate power.93 Indeed, the attempts to create market incentives to make firms regulate their be­hav­ior in global markets are largely deemed insufficient. Global markets, it seems, w ­ ill fail to produce a more just society in the absence of coercion and government intervention.

Two Takes on the New World of Global Corporate Justice From this perspective, recent developments can look quite reassuring. Corporations are now on trial. In areas as diverse as money laundering, tax evasion, corruption, environmental degradation, and anticompetitive practices, even the largest companies worldwide routinely find themselves accused of malfeasance, violations, and lack of compliance. If the rise of the chief financial officer within executive management characterized the shareholder value regime of the past de­cades, we now see the chief compliance officer and general counsels move to the center of executive management.94 Control over managerial decisions through shareholder oversight is ceding to outright ­legal enforcement. Multinational corporations are no longer above the law, it seems. However, what actually replaces the old world is not yet settled. Let us examine two competing perspectives on the transformation of global corporate justice, one saluting the rule of law as a necessary supplement to market or self-­discipline, the other concerned about the biases inherent in the power relations that underpin it. Cosmopolitan legalism, the first perspective, is supportive of a global framework able to bind even large corporations to shared po­liti­cal objectives. As Judith N. Shklar explains, legalism is “the ethical attitude that holds moral conduct to be a m ­ atter of rule following, and moral relationships to consist of duties and rights determined by rules.”95 Combined with cosmopolitan ethics that uphold a set of norms as universal, proponents ­favor a global rule of law in certain domains.96 From this standpoint, voluntary standards that have been used by companies in the past to showcase their social and ecological responsibilities are insufficient.97 Pointing to the experiences in the last

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de­cades where multinational companies successfully played the law to their advantage, they push for a more efficient way of enforcing corporate obligations. Some variant of cosmopolitan legalism is at work ­behind efforts to broaden l­egal regimes for sectoral governance, for example on intellectual property rights, the global fight against corruption, or international cooperation on corporate taxation.98 From a legalist perspective, what is noteworthy about the current evolutions is the number of cases brought against corporate offenders. By using new instruments, in par­tic­u­lar negotiated settlements, justice can fi­nally be done. Better equipped to lead investigations, prosecutors find themselves able to enter the maze of corporate operations and pursue perpetrators. Proponents thus highlight the efficiency of settlements in bringing corporate offenses to light but also in estimating and repairing the damage done, most notably through compensation for victims. The second perspective takes issue with negotiated justice and the participatory nature of corporate criminal prosecutions. Pointing in par­tic­u­lar to deferred prosecution settlements, t­ hese critics regret that establishing guilt has become secondary, most often sidelined in an agreement that focuses on sanctions and monitoring mechanisms to ensure ­f uture compliance. Deferred settlements focus on rehabilitation rather than retribution. Prosecutors are encouraged to “compromise with corporations” to strike “justice deals.”99 Even though corporate fines can be massive and compliance requirements highly constraining, the elimination of the notion of guilt is disconcerting. Corporate innocence appears to be “for sale”. At worst, corporate misconduct becomes just another cost of ­doing business. What is more, the marketization of justice creates impor­tant biases, linked to the mechanisms of t­ hese negotiations.100 Who negotiates, based on which criteria and with what kind of resources? Companies are not equal in their capacity to strike an agreement and to bear the costs of corporate penalties. Not all officers and employees benefit from the protection that can help se­nior management to avoid personal consequences. Critics thus warn about a system that w ­ ill exacerbate po­liti­cal and socio-­economic inequalities, b­ ehind a veil of l­ egal technicalities and the legitimacy of the rule of law. In sum, cosmopolitan legalism provides an optimistic reading of recent changes, while critics provide a much less benign perspective that draws attention to power relations and thus the possibility of strategic abuse. Contrary to legalist accounts, critics of negotiated corporate justice are keenly aware of the politics underpinning recent changes, in par­tic­u­lar the dominance of the

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United States in extraterritorial enforcement, the role of US law firms, and the pursuit of specific po­liti­cal and economic objectives.

The Rise of Negotiated Justice The criticism is expressed most strongly by t­ hose who identify a fundamentally dif­fer­ent paradigm of dealing with corporate criminal misconduct in the most recent transactions than the one that operated previously in dif­fer­ent domestic contexts. The paradigms reflect differences beyond the instruments, their settings, or the methods for prosecution of corporate malfeasance; the most striking change is a shift in the overall goals. Traditional corporate criminal law seeks to establish guilt and decide on the adequate punishment that meets the moral condemnation of the criminal act to deter f­ uture crime. Negotiated corporate justice attempts to address wrongdoing by settling a case in a manner that sanctions past be­hav­ior and prevents ­future recidivism. The compensation for the victims of the crime is as pre­sent as the rehabilitation of the corporate entity. Inversely, the question of wrongful intentions and the stigma that guilt carries are set aside. T ­ able 2.2 compares ­these two paradigms. The first paradigm may have been central to the justification for national corporate criminal law, but it is increasingly challenged by the second.101 As the more ­viable approach to corporate justice in global markets, the negotiation approach allows for the eschewing of difficult questions linked to locally rooted understandings of moral be­hav­ior. It can thus travel much more easily, which facilitates its use across bound­aries. Saluted by cosmopolitan legalists happy to be handed a tool, negotiated corporate justice helps to envision a ­legal approach in economic settings that are not easily delimited by national jurisdictions. As such, negotiated corporate justice is not simply a transplant from one domestic setting to another. It is a method of resolving normative conflict in a multilayered regime setting where domestic and sectoral norms collide. Following Hall’s taxonomy of paradigm change, this book argues that we are currently observing the rise of negotiated corporate justice.102 The aggressive extraterritorial application of US law has created tensions in the normal functioning of the corporate criminal frameworks abroad. At the most basic level, it shattered the belief that existing l­egal tools are sufficient to deal with corporate criminality. Very few corporations ­were ever brought to trial in the past. No information was available about malfeasance, and one might have simply concluded that criminal business activity was rare.

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­Table 2.2. Two paradigms of corporate justice Goals Method Instruments

Corporate Criminal Law

Negotiated Corporate Justice

Establish and punish guilt Trial -­ Fines -­Sentences for individual perpetrators

Prevent repetition, rehabilitation Negotiation -­ Fines -­ Monitoring of ­future compliance

In recent years, the oversight of American prosecutors sheds light on misconduct that had previously been out of the limelight. No m ­ atter how the information comes to be known, the public now has information about cases of fraud, corruption, tax evasion, environmental degradation, or the financing of questionable business partners. The growing number of cases where corporate misconduct went unpunished—­even if each may be considered an “anomaly”—­suggests that corporate criminal law in the past has been relatively toothless. One of the first reactions in many countries is to adjust the settings of their traditional instruments, increasing fines or initiating a growing number of investigations. But this is rarely sufficient. A second movement therefore has concerned the instruments made available to prosecutors. As the cross-­ country comparison w ­ ill show, institutional change in several countries creates new possibilities for negotiation with suspected corporations. The current normative tensions we are witnessing arise from the mismatch between negotiated justice and the traditional ambition of criminal justice: to establish guilt. If the goal of efficient corporate justice in global markets wins out over ambitions of righ­teousness, we are likely to see the concept of guilt become increasingly sidelined in corporate criminal prosecutions.

Conclusion Global market exchange brings with it a constant strug­gle over adequate l­ egal frameworks for activities beyond borders. As suggested by l­ egal regime theory, this includes the collision of normative ­orders. Although we ­will see that law can be exploited strategically in geopolitics, its transnational use triggers change that one cannot address by considering only interstate conflict. Criminal law in par­tic­u­lar reflects highly situated moral categories about right and wrong. As corporate criminal prosecution crosses bound­aries, we ­w ill see

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conflict not just along territorial lines but also along sectoral lines, pitting ­those that defend national prerogatives over corporate criminal prosecution against t­ hose that fight corruption, ­those that condemn business relations and arms trade or financial support for questionable foreign regimes, or ­those that are concerned about social or environmental damage arising from corporate activities. The Swiss story illustrates how tightly coercion, institutional reform, and normative change can be connected as a result. While many Swiss observers are lucid about American economic interests and describe their banks as “hostages” in a geopo­liti­cal strug­gle, they are also in ­favor of better ethical standards and multilateral cooperation to prevent tax evasion.103 Indeed, the twin challenge for governments whose firms are targeted by unilateral ­legal action is to address both the geopo­liti­cal challenge—­defending judicial sovereignty—­and the normative challenge—­addressing corporate malfeasance. The path of least re­sis­tance is to adopt negotiation as a method for corporate justice to gain access to corporate information and participate on an equal basis with US prosecutors. What may look like piecemeal institutional adaptation is in fact paradigmatic change in framing corporate justice in global markets. Importantly, this move t­ oward a negotiated approach fundamentally challenges the relationship between the law and the market. In his “rule of the law” liberalism, Friedrich Hayek suggested that the only function of a ­legal system is to provide the framework of property, rights, and obligations that allow for the spontaneous order of the ­free market.104 Similarly, the new institutionalist movement in law and economics stresses that strong l­egal rules and predictable enforcement are basic requirements for efficient markets and growth.105 Negotiated corporate justice and the growing importance of corporate criminal law in global markets make ­these assumptions look naive. Negotiation capacities in corporate criminal proceedings on both sides are decisively ­shaped by the distribution of resources through the market. Imposing the effective jurisdiction of extraterritorial laws crucially hinges on market power, in the US case on its capacity to control fundamental global infrastructures and grant access to the American market. On the com­pany side, the capacity to negotiate effectively and ultimately buy back its innocence also depends on economic resources and is thus distributed unevenly. Negotiated corporate justice enshrines quite visibly a hierarchical system of domination based on market power, where economic resources affect how justice w ­ ill be done. At the global level, the law does not just shape markets; it is, in fact, markets that shape the reach of law.

3 Corporate Prosecutions in the United States

at the ten-­y ear anniversary of the fall of Lehman ­Brothers the New York Times published an article entitled “The CEOs of Wall Street Sent to Jail.”1 Publicly denouncing what is largely incomprehensible to the general public, the entire page u­ nder the title was left blank. For an episode that has affected the lives of millions and created severe economic consequences for thousands of victims, the lack of criminal prosecution is indeed striking.2 Not only had global financial institutions proven to be “too big to fail,” they now appear to be “too big to jail.”3 Neither the market had disciplined corporate be­hav­ior through its ultimate punishment—­bankruptcy—­n or the ­legal system through trial and conviction. In the eyes of many, recent events demonstrated what they had long suspected: big corporations are above the laws of both markets and states. Diving deeper into the aftermath of the financial crisis reveals a more complicated story. Prosecutors across the country did not simply turn a blind eye to corporate crime. Quite on the contrary, the Department of Justice was ­under high pressure to make large financial institutions accountable for negligence, mismanagement, fraud, or other criminal activities that caused the near collapse of the entire economy. Responding to public outcry over greed and undue privilege, the government’s intention was no dif­fer­ent in 2009 than it had been a­ fter e­ arlier financial crises, where the boom and the bust ­were followed by a crackdown, additional regulation, and judicial consequences. ­After the savings and loans crisis, more than 1,100 man­ag­ers and executives from failed banks w ­ ere prosecuted in the 1990s, leading to a total of 839 convictions.4 Sentences w ­ ere far from negligible, including prison time and considerable financial fines.5 35

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What had changed in the last de­cades was not the desire to seek retribution but the difficulty of winning corporate prosecutions. Targeting individuals in highly complex organ­izations is a challenge for prosecutors. Investigating corporate criminality requires understanding a specific firm’s business activities, internal organ­ization, and competitive landscape. What is more, one needs to connect misconduct within the corporations to individuals who can be held accountable. Precisely this has gotten more and more difficult, as judges interpreted the law increasingly in f­ avor of corporate and executive rights, narrowed white-­collar criminal statues, and overturned prosecutors in a series of corporate cases since the turn of the c­ entury.6 Between 1995 and 2020, the share of white-­collar crime prosecutions at the federal level decreased by more than half. Orga­nizational sentences dropped to an all-­ time low in 2020.7 ­After a series of fiascos and losses in court in the 1990s, prosecutors continued to tackle corporate criminality but apparently focused on easy cases in recent de­cades. James Comey referred to such prudent prosecutors as “the chicken­shit club.” Freshly appointed as US Attorney for the Southern District of New York in 2002, he tried to push back by encouraging his team to bring cases even if they are not likely to win.8 What he did not foresee, however, was an alternative route to corporate prosecution that opened up at roughly the same period: negotiated settlements. Taken together, the difficulty in bringing corporate cases and the attractiveness of settlements profoundly transformed the Department of Justice’s approach to corporate criminal prosecutions within less than twenty years. It is impossible to understand what happened in global markets without studying the evolution of the US approach to corporate criminal enforcement. This chapter begins by discussing the tensions prosecutors face in tackling corporate crime and the history of incremental administrative changes to enforcement practices. A second section then provides an overview of the trends in corporate criminal prosecutions, highlighting three notable tendencies: the increased use of considerable financial penalties regularly breaking new rec­ords, the shift ­toward negotiated agreements rather than convictions, the decrease in the prosecution of individuals and, as a consequence, the drop in prison sentences associated with corporate criminality. The section then turns to criticism within ­legal scholarship and from the general public. A third section analyzes biases in corporate criminal enforcement in the United States, underlining in par­tic­u­lar the home bias of prosecutors. Foreign firms are considerably more likely to receive severe criminal sanctions, both at the orga­nizational and the individual

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level. This bias allows law enforcement to keep up a façade of being tough on corporate criminality, even when numerical trends indicate the contrary.

The Evolution of Corporate Criminal Enforcement One readily compares corporate criminality with individual crimes, but not only the fictitious nature of corporate personhood sets them apart. Companies are economic actors whose life cycle is defined by the rules of the market. A com­pany can die, in a manner of speaking, by becoming insolvent. Sentences for corporate crime can include the withdrawal of a com­pany’s license, but the severity of financial fines can indirectly produce the same result: forcing a com­pany into bankruptcy. According to the US Orga­nizational Sentencing Guidelines, the severity of punishment must be proportionate to the seriousness of the crime, the offender’s culpability, and the history of misconduct. In the most serious criminal cases, the preamble of the guidelines states, “the fines should be set sufficiently high to divest the organ­ization of all of its assets.”9 Indeed, a look at the overall trends reveals that one-­third to one-­half of all sentenced companies are unable to pay the entire fine.10 Unfortunately, the economic effect does not just produce itself as the result of a conviction in ways that are mea­sured and proportionate to the criminal offense. Markets are information systems, able to react quickly to signals, sometimes appropriately, sometimes wrongfully. When companies are brought to trial, market confidence can falter, affecting investment decisions, staff mobility, and consumer be­hav­ior, well before the end of an investigation. Publicly listed companies in par­tic­ul­ar are highly sensitive to market reactions, which can result from litigation in advance of any ­actual sentence. This creates a severe challenge for the princi­ple of due pro­cess of law, according to which a defendant is assumed innocent ­until proven guilty. The prob­lem with corporate criminality is that this due pro­cess cannot always be guaranteed. Market reactions to l­egal proceedings can drive a firm out of business, well ahead of the a­ ctual judgment. The case most often cited as a critical juncture is Arthur Andersen, the accounting firm that had audited the balance sheets of energy trader Enron and shredded documents shortly ­after the com­pany collapsed. Indicted for fraud, Arthur Andersen was convicted by a jury in June 2002, and within months, the firm closed down, costing tens of thousands of ­people their jobs. Far more impor­tant than the a­ ctual fine, the reputational damage was bitterly felt when the Supreme Court overturned the conviction in 2005. Cleared by the law,

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condemned by the market, Arthur Andersen’s case illustrated the disconnection between judicial and market discipline. As a result, prosecutors became more cautious in their pursuit of corporate crime.11 The market and the law follow logics that are rarely commensurable. Corporate criminality sits squarely on the intersection of the two fields. Not only does a criminal conviction impact employment, productivity, and ultimately growth, it can also be disproportionate to the wrongdoing or entirely disconnected as a ­simple market reaction to reputational damage. Over the last twenty years, the US Department of Justice has sought to find ways to do justice in corporate criminality while being mindful of the economic impact of their activities.12 This tension explains the general evolution t­ oward negotiated justice and ultimately the bias of US prosecution in ­favor of domestic firms.

A Recent History of Enforcement Practice Formally, US corporate criminal law is broader and more extensive than in most other countries. The com­pany and individual offenders are both liable for business crimes u­ nder American law. U ­ nder the doctrine of respondeat superior, Latin for “let the master answer,” a US com­pany and its executives can be liable for actions of low-­level employees. Corporate criminal liability was established precisely to encourage management to effectively monitor lawful be­hav­ior within their companies. This was the reasoning b­ ehind the Supreme Court decision New York Central & Hudson River Railroad v. United States in 1909, which argued that the respondeat superior princi­ple ­will ensure oversight and mea­sures within the organ­ization to prevent wrongdoing by individuals. De jure, firms can thus be held accountable for employees’ actions even if the firm has not benefited financially from the acts, has an explicit policy against the criminal activity or an effective compliance program, or has self-­ reported the activity. Although this regime formally covers all firms, it is most strictly applied to closely held firms, especially when the crime is committed by owner-­managers. Larger firms characterized by a separation between owner­ship and management are de facto ­under a “duty-­based liability regime,” where prosecutors expect firms to cooperate in monitoring and enforcement efforts and reserve criminal liability for ­those corporations that fail to do so.13 Corporate criminal liability covers a broad range of issues, from fraud, bribery, antitrust law and sanction violations to food and drug violations and

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environmental crimes. In 1991, John C. Coffee estimated that the number of regulatory statutes carry­ing criminal penalties was at around three hundred thousand, a figure most likely to be even larger ­today.14 Regulatory agencies ­will thus work with the Department of Justice to deal with cases that concern criminal offenses.15 How to enforce this vast number of potential cases has evolved over time. This transformation was not driven by statutory change introduced by Congress but through a series of guidelines the Department of Justice issued to prosecutors. The current de facto regime was formalized in a memorandum by Deputy Attorney General Eric Holder in 1999.16 The Holder Memo sought to make individuals accountable for corporate crime, rather than simply convicting the organ­ization. This required gaining access to more detailed information held within the com­pany. To facilitate investigations, the memo encouraged prosecutors to use their discretion and grant leniency to firms who effectively cooperated with prosecutors, in par­tic­u­lar if they had self-­reported promptly and a­ dopted a compliance program.17 The novel idea to barter over the course of prosecution would become central to the de facto duty-­based corporate liability regime. Initially, negotiated agreements remained rare, however, as the decision not to indict was in effect “criminal amnesty for firms engaging in the desired conduct.”18 This changed in 2003, when Deputy Attorney General Larry Thompson issued a second memo inviting prosecutors to exert more authority over firms by formalizing the conditions to avoid indictment in a deferred or nonprosecution agreement.19 Conditions are broad and cover conduct usually overseen by regulatory agencies: they include not only monetary penalties but also compliance programs, the appointment of monitors as well as structural changes. The formal negotiation of such obligations effectively transformed corporate criminal liability into duty-­based monetary criminal liability coupled with prosecutorial authority to regulate firm practices. Firms pay for past ­mistakes and accept changes in corporate practices and tightened oversight. Executives of publicly held companies could avoid criminal prosecution for wrongdoing committed within their firms, but in exchange prosecutors entered the boardroom.20 In the de­cade that followed, ­these negotiated settlements became a central instrument in the practice of corporate criminal enforcement. But the method came ­under intense scrutiny in the aftermath of the financial crisis of 2009. Even though the Department of Justice continued to stress that corporate prosecution efforts only made sense if they ended up holding

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individuals accountable, in real­ity very few officers or employees ­were charged. Not only did Wall Street executives avoid jail but the pattern appeared to have become more massive: companies signed an agreement, ensured adequate monitoring and compliance efforts, paid a large fine, but none of the executives—­the masters supposed to answer ­under respondeat superior—­ were brought to trial. In 2015, Deputy Attorney General Sally Yates attempted to strengthen the focus on individual offenders through a new set of guidelines.21 The Yates Memo tied leniency for cooperation to the delivery of full information on individual accountability and clarified that settlements are no substitute for charges against individuals. “The rules have just changed,” Yates announced. “If a com­pany wants consideration for its cooperation, it must give up the individuals, no ­matter where they sit within the com­pany.”22 However, the changes appear to have been largely aspirational and did not lead to more charges brought against executives. Weak enforcement was vis­i­ble during the Republican administration that took office in 2017.23 In the fall of 2018, Deputy Attorney General Rod Rosenstein declared that the policy was not fully enforced, b­ ecause it created practical challenges, impeded agreements, and wasted resources. He proposed relaxing the Yates Memo to allow for speedier resolutions by concentrating on the individuals whose involvement was substantial. This new “softer” policy makes it likely that enforcement is not substantially dif­fer­ent now than it was in 2003 when the Thompson Memo first formalized nonprosecution and deferred prosecution agreements. It might even be laxer, as the Trump administration has ostensibly held a protective hand over corporations, pushing against the “piling on” of enforcement efforts. Unsurprisingly, corporate penalties dropped in ­these years.24 In addition, the Department of Justice expanded the possibility to decline charges altogether. Unlike traditional declinations issued when incriminating evidence was insufficient, the new declinations tested in foreign bribery enforcement apply to cases which have merits but are not pursued.25 Even for ­legal experts, “the line between a non-­prosecution agreement and declination can be fine.”26 Overall, partisan changes seem to affect the ambition to be tough on corporate crime, a goal stated in par­tic­u­lar u­ nder Demo­cratic leadership, but the trend in enforcement practices is largely disconnected: it is not standardized rules that govern US corporate criminal enforcement but instead a flexible negotiation approach with highly variable outcomes.

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Negotiated Settlements In traditional corporate criminal enforcement, prosecutors must decide at the end of an investigation ­whether to bring the corporation to trial, drop charges, or enter into a plea agreement. Plea agreements—­w here the corporation pleads guilty to the charges to avoid a lengthy trial—­are attractive to both parties, when ­there is ­little uncertainty about the facts and the outcome. They result in a criminal conviction of the corporation and sentences governed by the Sentencing Guidelines for Organ­izations ­adopted in 1991. However, a criminal conviction always comes with considerable collateral damage, such as reputational costs or the inability to participate in public contracts. Signed at the Department of Justice or a US Attorney’s Office, plea agreements have been widely used, which means that judges and juries are sidelined, even in traditional corporate criminal cases.27 With the new guidelines issued in the early 2000, another possibility opened up. Like plea agreements, nonprosecution and deferred prosecution agreements are pretrial settlements, but they do not include a conviction. In a nutshell, ­these settlements between prosecutors and companies require the latter to obey the law and pay a price for committed offenses without formally admitting their guilt. While deferred prosecution agreements must be reviewed by a judge, nonprosecution agreements are not filed and reviewed in court. Put differently, deferred prosecution agreements imply that criminal charges are filed, kept on the judge’s docket ­until an agreed end date, and eventually dismissed, while nonprosecution agreements happen entirely outside of courts and entail no filing of charges. The negotiation of ­these agreements is voluntary and requires the cooperation of the com­pany to specify the acts in question. The com­pany can refuse and insist on its right to a trial, but it then ­faces substantial costs and risks reputational damage during the trial, a criminal rec­ord in case of conviction, and a significantly higher sentence. It is easy to see why corporations would prefer a nontrial resolution. Most deferred and nonprosecution agreements go beyond a ­simple ex post sanction for past be­hav­ior. According to Anthony and Rachel Barkow, prosecutors take on explic­itly regulatory roles, as they impose conditions such as changes in staff, orga­nizational structure, and business practices; mandatory oversight by assigned monitors on the com­pany board; and new modes of corporate governance.28 As an example, one can cite former New York attorney general Eliot Spitzer, who referred to himself as “prosecutor-­slash-­regulator”

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to describe his ambitious agenda to reform business conduct on Wall Street.29 Imposed changes through settlements can indeed by quite extensive, which signals that t­ hese agreements go beyond s­ imple law enforcement and attempt to shape ­future corporate conduct. A recent analy­sis of the global financial industry demonstrates that prosecutorial activism has fundamentally reshuffled oversight of global banks, which was previously the exclusive preserve of a network of specialized regulatory agencies.30

Overview and Trends A bird’s-­eye perspective of t­ hese evolutions brings to light the most salient trends in corporate criminal prosecution: (1) a steep rise in the amounts of financial penalties; (2) the emergence of deferred or nonprosecution agreements; and (3) a slow but steady decline in the prosecution of individual offenders linked to corporate investigation. Let us consider each in turn. First, the Corporate Prosecution Registry, a dataset of corporate prosecutions at the federal level, shows that financial penalties have grown steadily, in par­tic­u­lar during the first de­cade of the twenty-­first ­century.31 With roughly 180 cases handled by federal prosecutors each year for most of the period, cumulative fines have moved from u­ nder one billion dollars to several billion dollars each year. Average fines have risen from $3.3 million in 2000 to $20 million or more in e­ very year since 2012. Corporate criminal financial penalties can be even larger than the data on fines presented in Figure 3.1, as the total payment may include disgorgement or restitution costs. What is more, the Corporate Prosecution Registry data also does not include civil penalties and additional fines paid to regulatory agencies. To cite just one example, in 2016 Deutsche Bank settled a case of fraud charges in mortgage-­backed securities trading during the subprime mortgage crisis for $7.2 billion in civil monetary penalties and consumer relief payments that are not included in this graph. For corporations that ­settle a series of cases, as financial institutions have done in the aftermath of the crisis, the costs far exceed what is represented in Figure 3.1. Comparing this l­ imited overview of corporate criminal fines at the federal level with more comprehensive datasets that include civil regulatory violations at dif­fer­ent levels of government confirms a general trend t­ oward rising monetary penalties. With data from all parts of the Justice Department and regulatory agencies at the federal and state levels, the Violation Tracker of Good Jobs First collects data from over 400,000 cases of corporate misconduct for a total $633 billion in penalties from 2000 to 2020.32 The top ten offenders all paid

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7

Case 300

6

250

5

200

4 150

3

100

2

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0

2003

0

2002

50

2001

1

Number of cases (dotted line)

Fine

2000

$ billions in cumulative fines (bar chart)

8

figure 3.1. Total fines and number of cases per year. Data source: Garrett and Ashley, Corporate Prosecution Registry, 2021.

over $10 billion each, with Bank of Amer­i­ca ranking first, with $82 billion paid in 213 cases since 2000, followed by JP Morgan Chase, with $34 billion in 154 cases. As this data is gathered from 250 agencies in multiple domains, we ­will concentrate more narrowly on corporate criminal fines in this book. Still, the overall trend clarifies why former attorney general Eric Holder argued in 2013 that the money collected at the federal level and through state agencies represented close to three times the cost of the ninety-­four US attorney offices and the Justice Department’s litigation divisions. With billions of fines paid each year, the idea is gaining ground that corporate prosecutions “can be treated as a government profit center.”33 Figure 3.2 shows the second trend: deferred and nonprosecution agreements become increasingly common a­ fter the respective Department of Justice guidelines outlining their use. Barely used prior to 2000, ­these settlements have risen to between twenty and forty cases per year, with a peak reached in 2015 through the Swiss Bank Program, which account for seventy-­five nonprosecution agreements in that year alone. The Swiss Bank Program is the bilateral agreement signed between Swiss authorities and the Department of Justice in 2013 discussed in the previous chapter. Aiming to break the standoff between the two countries over banking secrecy, it grants leniency to the banks that resolved criminal liabilities related to tax evasion.34 To be sure, the majority of corporate criminal cases are settled through plea agreements, which account for 86 ­percent of the cases covered in the

Non-prosecution agreements

Deferred prosecution agreements

Swiss Bank Program NPAs

% of total cases

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

0

2010

% (line chart)

10%

2009

20

2008

20%

2007

40

2006

30%

2005

60

2004

40%

2003

80

2002

50%

2001

100

2000

Number of cases (bar char)

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0%

figure 3.2. The rise of deferred and nonprosecution agreements. Data source: Garrett and Ashley, Corporate Prosecution Registry, 2021.

Corporate Prosecution Registry. Together with the two newer forms of settlements, negotiated agreements make up 98.7 ­percent of corporate prosecutions. Trial in front of a judge and jury or the formal dismissal of a case is very rare. Even though deferred and nonprosecution agreements are used less frequently than plea agreements, their importance has grown over time. This is vis­i­ble in absolute numbers and as a share of the total of corporate prosecution at the federal level. More importantly, it is the instrument of choice for dealing with large corporations. Public companies, i.e., ­those listed on US stock exchanges, are much more likely to s­ ettle a deferred or nonprosecution agreement. Of the 322 public companies in the dataset, 60 ­percent have done so in the past, compared to only 11 ­percent of 3,328 privately held companies (Figure 3.3). Inversely, only 38 ­percent of public companies enter into plea agreements, compared to 87 ­percent of privately held companies. The new framework for dealing with corporate criminality is clearly geared t­ oward large and complex organ­izations, as we see by this variation in disposition types. One can suspect that the publicly listed companies are the ones where prosecutors have experienced setbacks in the past due to more difficult access and a lower chance of

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Public

28.9

31.7

38.2

Private 6.3 4.9

0%

10%

87.4

20%

Non-prosecution agreement

30%

40%

50%

60%

Deferred prosecution agreement

70%

80%

Plea agreement

90%

100% Trial

figure 3.3. Variation in dispositions by com­pany type. Data source: Garrett and Ashley, Corporate Prosecution Registry, 2021.

determining responsibilities for corporate choices. This would explain the attractiveness of negotiation to resolve such cases. Fi­nally, Garrett’s work reveals a third trend: that the increased use in deferred and nonprosecution agreement has not led to a rise in individual prosecutions, even though that was part of the initial ambition b­ ehind the new guidelines.35 The prosecution of individual offenders in connection with corporate prosecution happens in ­under ten cases each year. This observation appears to be in line with the more general observation that white-­collar crime prosecutions had steadily declined, hitting an all-­time low by the end of 2020.36 In sum, deferred and nonprosecution agreements have become firmly established in the landscape of corporate criminal law, especially for large corporations. Overall, they contribute to a trend of rising monetary penalties but have contributed ­little to holding individuals accountable for corporate crime.

Criticism The turn ­toward deferred and nonprosecution agreements has not gone unnoticed and has sparked considerable debate in the l­ egal profession. One eminent scholar considers it “a racket” that “erodes the most elementary protections of the criminal law, by turning the prosecutor into judge and jury, thus undermining our princi­ples of separation of powers.”37 Another scholar and former federal prosecutor is outraged over the use of settlements in even the most serious cases, such as Massey Energy’s Upper Big Branch Mine disaster, where a massive explosion killed twenty-­nine miners in 2010. He warns that negotiated

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settlements erode the punitive and deterrence value of criminal enforcement. The secretive nature of negotiations “cannot ensure that abuse of power does not occur” and denies the victims’ families the right to a trial.38 Indeed, all accounts of the recent trend highlight the untransparent and idiosyncratic nature of criminal enforcement through settlements due to the high levels of discretion held by the prosecutors.39 This creates room for favoritism, such as the possibility to name corporate monitors—­paid for their membership on corporate boards—­which have personal ties to the prosecutors. One agreement negotiated by Chris Christie, when he was US Attorney for the District of New Jersey, includes an endowed chair on “Corporate Governance & Business Ethics” that Bristol-­Myers Squibb agreed to create at Christie’s alma mater, Seton Hall University School of Law.40 ­Others include terms in line with policy objectives, such as the installation of slot machines in an agreement with the New York Racing Association to produce profits channeled ­toward public schooling in the state of New York.41 Concerns over the effects of negotiated settlements range from the adequacy of sentences to the capacity to bring charges against individual offenders and the effectiveness of ensuring ­future compliance. Let us consider ­these in turn. US sentencing guidelines are designed to ensure appropriate punishment for criminal acts, proposing detailed criteria for establishing fines, including consideration for the size of the com­pany, the involvement of se­nior management, the degree of cooperation with internal investigations, and the solidity of their compliance programs. However, when it comes to deferred or nonprosecution agreements, they are rarely used. When applied strictly, US sentencing guidelines appear to discourage companies from cooperating with the investigation.42 The more flexible approach a­ dopted by the Department of Justice has introduced leniency to address precisely this difficulty, sacrificing universally applicable rules for adequate punishment in the pro­cess.43 The ambition of the new approach was to improve prosecutors’ ability to bring charges against individual offenders. This is the explicit objective of the incentive systems repeated on multiple occasions by the Department of Justice. In practice, however, the barter logic creates impor­tant tensions within the corporations, which must manage the tradeoffs between the collective benefits for the com­pany against the costs carried by individual employees. Attorney-­client privilege on behalf of employees can be waived, allowing the corporate entity to exploit individuals to allow the corporation to negotiate with the government.44 Simply put, the com­pany has an interest in “delivering”

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individual offenders, who may feel that they are being sacrificed unjustly. Unsurprisingly, prosecutors, frustrated with the identification of “small fish” rather than top executives, have preferred to abandon individual criminal charges in many cases. A survey of over ten years of deferred and nonprosecution agreements shows only one-­third ­were connected to the prosecution of individuals, with very few of them top executives.45 The effectiveness of the new enforcement regime in ensuring f­ uture compliance and improving corporate conduct is also questioned.46 Leniency undermines the general deterrent effect of criminal convictions, leading some to suspect that the new deals represent “a victory for the forces of big business who for de­cades have been seeking to weaken or eliminate corporate criminal liability.”47 To begin with, despite the massive fines, constraining compliance programs and judicial review in certain cases, we do see recidivism among corporations that have settled in the past. Analyzing 535 deferred or nonprosecution agreements entered since 1992, Public Citizen identified thirty-­eight corporations as repeat offenders. Of t­ hese, 63 ­percent ­were even able to negotiate additional settlements, most of them major global corporations. Surprisingly, the prosecutors are not punishing corporations for violating the agreements. Only seven corporations ­were held accountable for breaching the terms of an agreement, actually prosecuting the com­pany in as few as three instances. Put differently, prosecution was literally “deferred” in u­ nder 0.6 ­percent of all cases.48 It is difficult to imagine similar leniency granted to an individual criminal defendant. Moreover, prosecution does not seem to have a systematic effect on the personal situation of the com­pany’s CEO. Even without charges brought against them directly, one might expect that CEOs are held accountable for the l­ egal difficulties the companies went through, ­either by losing their position or through reduced executive pay. A recent study finds that “heads do roll” as a result of prosecution in roughly one-­fourth of the cases studied. However, executive pay did not vary significantly during or in the aftermath of prosecution.49 Without suggesting that ­legal b­ attles leave a com­pany unscathed, we can see that criminal liability does not result in turnover or diminished pay for the top executive in 75 ­percent of recent cases. Fi­nally, a recent evaluation of the effectiveness of criminal fines in the financial industry finds that repeat offenders are often very large companies, but they also receive smaller fines than non-­recidivist companies (mea­sured as a percentage of assets and revenue).50 Without a credible risk of prosecution, significant and systematic

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personal consequences for management, and adequate monetary penalties, criminal sanctions may have simply become the cost of ­doing business for large corporations.

Benefits from the New World of Corporate Justice The success of negotiated settlements cannot be explained with reference to the princi­ples of justice and equity, nor do they provide ­legal certainty or succeed in effectively shaping corporate conduct. They do, however, provide prosecutors with an instrument to bring more challenging cases; improve access to the companies’ staff, servers, and archives; and thus address issues that ­were previously out of reach. Remember that 95 ­percent of corporate convictions saw the orga­nizational offender plead guilty, suggesting that complex cases are simply not prosecuted. The “chicken­shit club” was a consequence of the untenable position of prosecutors, who w ­ ere ill equipped to take up the fight with large corporations, despite the help of investigators and regulatory agencies. By introducing negotiated settlements more flexible than plea bargains, the Department of Justice tried to develop a more ambitious corporate justice policy that si­mul­ta­neously sought to control collateral damage, which ultimately meant economic stability. Unfortunately, it may well prove impossible to combine economic and ­legal objectives into effective corporate criminal enforcement.51 Let us therefore consider the other benefits of negotiated corporate justice for the government and prosecutors. This requires understanding the scope of government authority and the motivations guiding prosecutors, in par­tic­ul­ ar (1) po­liti­cal accountability, (2) the public interest, and (3) ­career motives.52 First, as part of the executive branch of government, the Department of Justice and the attorney general’s offices ultimately report to the president. Long-­standing norms limit the ability of politicians to intervene in specific cases, however, to ensure a separation of powers. Frequently repeated by politicians and prosecutors, this princi­ple of nonintervention in judicial decisions allows po­liti­cal decision-­makers to decline responsibility when they are pushed to influence specific prosecutions.53 Even if the separation was questioned ­under the Trump administration, it is fair to say that executive influence most commonly takes the form of nominations to se­nior positions, overall guidelines, and resource allocation.54 ­These decisions can profoundly affect administrative priorities, as one can see by the shift to counterterrorism in the aftermath of September 11, 2001, or the surge in financial industry cases

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brought ­after the crisis of 2009.55 Likewise, the US Congress plays an impor­ tant role in supervising criminal enforcement by controlling appointments and the bud­get as well as through regular oversight hearings. In addition, Congress can change the appliable law or transfer authority between agencies. Through ­these mechanisms, prosecutors can be held accountable and are likely to adapt to the priorities of the executive or the legislative branch, as one can see from the drop in cases brought ­under the Trump administration. Secondly, beyond their po­liti­cal accountability, prosecutors may also be motivated by the defense of the public interest. Prosecutors’ self-­understanding of their role, repeated in canonical speeches and ethics rules, is to defend the innocent and to ensure that the guilty receive an appropriate sentence. Their primary objective is to serve justice and distinguish between right and wrong, unlike regulators who may consider issues relevant for production and growth. In the adversarial criminal justice system described in Chapter 2, prosecutors also serve as the guardians against abuse from concentrated po­liti­cal or economic power. Being tough on corporate crime is in princi­ple aligned with an egalitarian understanding, where citizens need to be protected from public harm at the hands of corporate players. Fi­nally, numerous accounts point to the importance of c­ areer motives in prosecutorial choices. Although some prosecutors embark on a lifelong ­career in public ser­vice, a ­great many choose it as a stepping stone to po­liti­cal ­careers or success in private law firms seeking to benefit from their litigation experience. In par­tic­u­lar, US attorneys and se­nior officials in the Department of Justice often have po­liti­cal ambitions and actively seek to build a reputation by bringing noteworthy cases.56 Since they have to secure po­liti­cal support to be nominated in the first place, their ­career ladder is colored by partisan priorities.57 ­W hether prosecutors are aiming for a private c­ areer or public office, a rec­ord of successful prosecutions and landmark cases is an impor­tant asset. One can understand that prosecutors do not want to embark on cases they ­will lose, and it is likely that they also carefully evaluate cases for which they might be heavi­ly criticized. At the same time, they need to demonstrate that they are aggressive and do not shy away from power­ful opponents. This delicate balancing act requires being both aggressive and mindful, challenging the power­ful but in ways that have the right po­liti­cal backing. Deferred and nonprosecution agreements help precisely to solve this conundrum. Prosecutors are fi­nally able to bring difficult cases and declare victory, without bringing large corporations to their knees in ways that would create economic fallout.

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In addition, the new settlements have also brought significant benefits: the money collected from fines flowing into public chests. The settlement amounts often exceed victim compensation, and in some cases, victims are hard to identify. Where the money goes can vary depending on the type of crime and the agencies involved in the prosecution, but it is fair to say that a substantial portion goes into public bud­gets. Fines can go to federal or state general funds or funds dedicated for ­future enforcement and education.58 Illustrative of this development is the case of New York District Attorney Cyrus Vance, who secured $808 million from criminal penalties against three international banks—­HSBC, Standard Chartered, and BNP Paribas—in 2015, representing nearly ten times his office’s annual bud­get. As he is legally required to spend the funds on criminal justice proj­ects, it has “transformed Mr. Vance into a kind of Santa Claus for the law-­enforcement world, with a sack filled with new programs and equipment.” For the district attorney, this has meant a “once in a life-­time chance” to make “transformative investments,” even though he has insisted that he was not investing “in anything crazy.” Critics are less sober in the evaluation of the massive amounts, arguing that “it is a strange ­thing to have an elected district attorney who finds himself in the role of making grants and shaping the field.”59 To be sure, the idea b­ ehind general or earmarked funds for ­future enforcement and education is precisely to avoid any appearance of impropriety. It is nonetheless clear that the sums involved are not trivial and that they do distribute resources to law enforcement and public bud­gets in ways that can even benefit certain participants individually. To summarize, the last two de­cades of corporate criminal law enforcement have provided prosecutors with new tools to tackle cases that w ­ ere previously out of their reach. Through flexibly negotiated settlements over criminal liability, they have moved center stage in regulatory enforcement and have been able to extract substantial sums from targeted corporations. While companies clearly prefer deferred and nonprosecution agreements to criminal convictions, law enforcement officials also reap considerable benefits that are in­de­ pen­dent from the ­actual effectiveness of the new policy in fighting corporate crime. Critics therefore call for more transparency of what one report calls a “shadow regulatory state” where “En­glish majors with law degrees are remaking entire industries, without clear ­legal authorization, public transparency or much if any judicial oversight.”60 In comparison to regulators, prosecutors do

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not systematically collect information or solicit public comments when they issue decisions. Their focus is on the case at hand, not in establishing princi­ ples that can apply uniformly to an entire industry. Consequently, “haphazard interventions by prosecutors could create inefficient rules and competitive disparities among firms.”61 One area where this trend is striking is in the systematic home bias of prosecutorial decisions.

Global Enforcement—­Home Advantage As US law enforcement has expanded its reach, it is pos­si­ble to compare the impact of the recent evolutions for foreign and domestic firms. This section shows that foreign firms pay considerably higher fines across all areas of criminal charges. Indeed, a good portion of recent trends in corporate criminal enforcement is due to the fact that more and more foreign firms are now targeted by US authorities. Global enforcement may have given prosecutors an even more appealing solution to the initial conundrum of having to be tough on corporate crime without bringing impossible cases or risking po­liti­cal fallout. Being tough on foreigners may just be the ideal strategy. Of the cases listed in the Corporate Prosecution Registry, 16 ­percent are foreign companies, but they account for almost 60 ­percent of all fines collected and 52 ­percent of total payments.62 Average fines are significantly higher for foreign firms ­every year since 2001. Garrett analyzed the home bias of globalized corporate prosecution a de­cade ago by comparing US Sentencing Commission data with his own collection of deferred and nonprosecution agreements and publicly reported convictions.63 He finds on average five to seven times higher fines for foreign companies.64 Fines are meant to reflect the nature of the crime committed and damage done, and we would expect it to vary with the size of the com­pany. Indeed, ­there is considerable variation in fines across domains. Antitrust, foreign corrupt practices, and phar­ma­ceu­ti­cal cases have significantly larger fines throughout the dataset. The spectrum of fines has a significant spread, with many firms receiving only nominal fines, while ­others pay hundreds of millions of dollars. If one considers the record-­breaking top end, one also finds securities fraud and bank secrecy, in par­tic­u­lar in the aftermath of the financial crisis, as well as landmark cases in environmental damage. The dataset does not include information about assets or revenue of the companies, but it does distinguish between privately held and publicly listed companies, which are far larger.

52  c h a p t e r 3

A regression analy­sis allows us to analyze w ­ hether certain types of companies, disposition types, or types of crimes correlate with higher fines and/or total payments when controlling for each other. A regression on log fines, like the one Garrett provided ten years ago, confirms that foreign companies pay higher fines for comparable crime categories, but the growth has increased from a magnitude of seven to twenty-­eight.65 Such a massive increase—­paying on average twenty-­eight times more than a domestic com­pany when most fines are already in the millions—­indicates that the analy­sis might overlook some feature of the data that should be taken into account. Indeed, a striking number of prosecutions result in nominal fines: throughout the entire period 28 ­percent of all companies prosecuted paid no fine whatsoever. The following analy­sis therefore ­adopted a two-­part model that first tries to explain the probability of paying a fine at all and second to estimate the most likely volume of the fine if ­there is one. In the first step, a probit regression estimated the binary result “pay a fine” or “pay no fine,” using the com­pany types, the disposition types, and the crime categories as in­de­pen­dent variables.66 The marginal effect of the com­pany types shows that the probability of getting a fine increases by 14.8 ­percent when the com­pany is foreign rather than American. Similarly, public companies are 7.7 ­percent more likely to receive a fine. The second step of the analy­sis focuses only on the cases where companies have paid a fine to estimate how much each ­factor contributes to the size of the fine. The linear regression on log fines presented in T ­ able 3.1 shows the estimate and standard error in the first two columns and then pre­sents the exponentials of the coefficients to show how many times larger the fines ­were for a given category, within the lower and upper limit of a 95 ­percent confidence interval listed in the last two columns. Even ­after controlling for the other characteristics, foreign companies receive a fine that is 6.6 times larger than the fines paid by domestic companies. Public companies also pay larger fines, 8.2 times bigger than the ones received by privately held companies. The regression analy­sis also indicates considerable variation in fines according to crimes committed, with the largest fines in antitrust cases, securities fraud, and kickbacks but also phar­ma­ceu­ti­cal fraud and foreign corrupt practices. The two-­part model indicates that foreign and public companies are more likely to pay fines and ­will receive penalties of greater magnitude. We should expect the positive effect for public companies, since they are larger than private companies. As big and complex organ­izations, they have a greater possibility to commit crimes that affect a large number of victims. But it is not clear

­Table 3.1. Linear regression on log fines (for cases with fines only) Coefficient

Standard Error

Exponential (coef)

1.89*** 2.11***

0.15 0.18

6.61 8.22

4.95 5.77

8.83 11.70

Type of disposition DP NP Plea Trial

Ref. −0.87** −2.54*** −1.33**

0.29 0.22 0.49

0.42 0.08 0.27

0.24 0.05 0.10

0.73 0.12 0.69

Type of crime Maritime Pollution Antitrust Bank Secrecy Act Bribery Controlled Substances Environmental FCPA FDCA / Pharma False Statements Food Fraud—­Accounting Fraud—­General Fraud—­Health Care Fraud—­Securities Fraud—­Tax Gambling Immigration Import / Export Kickbacks Money Laundering Workplace Safety Obstruction of Justice Other Wildlife Constant

1.39*** 3.43*** 0.67 1.60** −0.73 0.86*** 1.82*** 2.24*** 0.40 −0.63* 0.74 1.08*** 0.97** 3.33*** 1.08** −1.22* −1.12*** 0.71** 2.60*** 0.09 0.27 1.38** Ref. −0.82** 13.33***

0.30 0.24 0.56 0.48 0.39 0.20 0.30 0.29 0.27 0.30 1.06 0.22 0.37 0.73 0.34 0.59 0.29 0.27 0.63 0.40 0.46 0.52

4.01 30.78 1.96 4.95 0.48 2.36 6.18 9.43 1.49 0.53 2.10 2.96 2.65 28.05 2.94 0.29 0.33 2.03 13.44 1.09 1.31 3.97

2.25 19.32 0.65 1.91 0.23 1.59 3.43 5.37 0.89 0.30 0.26 1.94 1.28 6.69 1.50 0.09 0.19 1.20 3.88 0.49 0.53 1.44

7.16 49.03 5.91 12.78 1.04 3.51 11.13 16.55 2.51 0.96 16.75 4.52 5.48 117.52 5.78 0.94 0.58 3.44 46.53 2.41 3.21 10.96

0.30 0.28

0.44

0.25

0.78

Variable Type of com­pany Foreign Public

N R² * p